Asian markets experienced a decline on Tuesday, driven by concerns about interest rates following hawkish remarks made by a senior Federal Reserve official, signaling that the central bank was likely to maintain higher rates for an extended period.
Despite a significant drop in the past year, inflation in the United States continues to remain stubbornly above the Federal Reserve’s long-term target of two percent. This has led the majority of Fed officials to predict the necessity of another rate hike later this year.
Federal Reserve Vice Chair for Supervision, Michael Barr, conveyed his expectation at a conference in New York on Monday that interest rates would need to be kept at a “sufficiently restrictive level” for an extended period to control inflation. Barr’s comments align with the views of most of his colleagues, who recently lowered their expectations for the number of rate cuts in 2024, indicating an extended period of elevated rates.
Since March 2022, the Fed has increased its key lending rate 11 times, reaching a 22-year high. With inflation persistently exceeding its target, there is a consensus that “the Fed is gonna keep rates high and we are expecting higher rates for longer,” as noted by Xi Qiao, Managing Director for Wealth Management at UBS, in an interview with Bloomberg Television. However, this could potentially bring caution to the equity markets.
On Wall Street, trading ended with mixed results after a congressional deal was reached to avert an immediate US government shutdown. However, bond markets experienced a significant sell-off.
Stephen Innes from SPI Asset Management commented on the situation, stating, “Any ‘relief rally’ from the US government spending deal appears to have been short-lived as bond markets witnessed a deepening selloff, leading to rising yields across the curve.”
The yields on US Treasury bonds, especially the 10-year and 30-year bonds, remained notably high, reaching levels not seen in years. These Treasury bond yields are closely monitored as indicators of US interest rates.
Innes explained, “This yield surge reflects the market’s response to messaging from the Federal Reserve, indicating the central bank’s commitment to keeping borrowing costs elevated to combat inflation.”
Hong Kong led the decline in Asian equities on Tuesday, falling by nearly three percent as the market resumed trading following a holiday weekend. In contrast, the heavily indebted Chinese property giant, Evergrande, witnessed a stock price increase as it resumed trading in Hong Kong, days after its CEO was announced to be under criminal investigation.
Other Asian markets, including Tokyo, Sydney, Wellington, Singapore, Manila, and Bangkok, also saw declines, while Taipei and Jakarta remained relatively flat. Kuala Lumpur was the only market to register gains.
