Asia shares slip, Fed flags higher rates for longer

SYDNEY: Asian shares slipped on Thursday (Nov 3) after the US Federal Reserve shifted the outlook on tightening from short and sharp to long and high, putting to rest any thought of a near-term pause.

Investors were initially cheered that the Fed opened the door to a slowdown in the pace of hikes after raising interest rates 75 basis points to 3.75 per cent to 4.0 per cent, by noting that policy acted with a lag.

But Chair Jerome Powell soured the mood by saying it was "very premature" to think about pausing and that the peak for rates would likely be higher than previously expected.

"The Fed is now more comfortable with taking smaller rate increases for a longer period than delivering larger increases now," said Brian Daingerfield, an analyst at NatWest Markets.

"The tightening cycle is officially now a marathon, not a sprint."

Futures were now split on whether the Fed would move by 50 basis points or 75 basis points in December, and nudged up the top for rates to 5.0 per cent to 5.25 per cent likely by May next year. They also imply little chance of a rate cut until December 2023.

"Powell's comments reinforced our expectation that the December dot plot will show a higher median projection of the peak funds rate and that the FOMC will ultimately hike past February next year," wrote analysts at Goldman Sachs.

"We see the risks to our peak funds rate forecast of 4.75 per cent to 5 per cent as tilted to the upside."

All this was not what the equity markets wanted to hear and Wall Street fell sharply after Powell's comments. Early Thursday, S&P 500 futures had edged up 0.2 per cent, while Nasdaq futures added 0.3 per cent.

EUROSTOXX 50 futures followed the overnight move and fell 0.7 per cent, while FTSE futures lost 0.5 per cent.

MSCI's broadest index of Asia-Pacific shares outside Japan shed 1.7 per cent, with South Korea down 0.3 per cent.

Japan's Nikkei was closed for a holiday, but futures were trading around 300 points below Wednesday's cash close.

Chinese blue chips eased 1.2 per cent after a survey of the service sector showed activity contracted due to COVID-19 restrictions with the Caixin PMI dropping to 48.4.

BoE TAKES THE STAGE

Two-year Treasury yields popped up to 4.63 per cent as the curve bear flattened, with the spread to 10-year notes near its most inverted since the turn of the century.

Attention now moves to the US ISM survey of services later on Thursday and Friday's payrolls report where any upside surprise will likely reinforce the Fed's hawkish outlook.

Also taking centre stage will be the Bank of England where the market is fully priced for a rate hike of 75 basis points to its highest since late 2008 at 3.0 per cent.

"There will be interest in the BoE's new CPI and GDP forecasts, with the latter likely to show a deeper and more protracted recession in 2023 and 2024," said Ray Attrill head of FX strategy at NAB.

A gloomy outlook could put more pressure on the pound, which was pinned at US$1.1408 after retreating from a top of US$1.1564 overnight.

The US dollar was broadly bid following Powell's hawkish take, before running into profit-taking in Asia. The dollar index stood at 111.890 after an overnight bounce from a 110.400 low.

The euro was a fraction firmer at US$0.9830, having toppled from a high of US$0.9976 overnight. The dollar gave back some of its gains on the yen to stand at 147.24, but that was still up on Wednesday's trough of 145.68.

The bounce in the dollar and yields was a drag for gold, which was stuck at US$1,637 an ounce after being as high as US$1,669 at one stage overnight.

Oil prices also disliked the dollar rally with Brent down 29 cents at US$95.87 a barrel, while US crude fell 44 cents to US$89.56.

In good news for bread lovers, wheat futures plummeted overnight after Russia said it would resume its participation in a deal to export grain from war-torn Ukraine.