Asian markets experienced fluctuations on Wednesday as Federal Reserve Chairman Jerome Powell’s suggestion that interest rates might remain higher for an extended period counteracted a rebound following the recent Middle East-induced selling.
While investors anxiously awaited Israel’s response to Iran’s missile and drone attack over the weekend, the absence of immediate retaliation shifted attention to the monetary policy stance of the US central bank.
A series of inflation and job data releases in the first quarter, which exceeded expectations, compelled investors to recalibrate their expectations regarding the number of interest rate cuts the Fed might implement this year.
Powell virtually confirmed that interest rates would probably stay elevated for a longer duration than previously anticipated. “Recent data have not increased our confidence and instead suggest that it will likely take more time than expected to regain that confidence,” he cautioned on Tuesday in Washington. “Given the robust labor market and progress on inflation so far, it is prudent to give restrictive policy additional time to be effective and to let the data and the evolving outlook guide our decisions.”
The Fed’s most recent rate guidance, indicated by the “dot plot,” implied three rate cuts for this year, with June being considered for the first reduction. Initially, traders had priced in as many as six cuts at the beginning of the year. However, current predictions suggest only one or two cuts at best, possibly commencing in July or September. Some even argue that the next move could be a rate hike if inflation does not retreat to the Fed’s two percent target.
Powell’s comments align with sentiments expressed by several Fed officials, who have advocated for caution in timing the normalization of rates. Richmond Fed President Thomas Barkin remarked on Tuesday that recent economic indicators did not support the notion of a soft landing for the economy. Meanwhile, Fed Vice Chair Philip Jefferson anticipated a decline in inflation but anticipated that rates would remain elevated due to lingering price pressures.
In New York, the S&P 500 and Nasdaq declined, though the Dow managed to secure a gain. Asian markets displayed mixed performances, with Tokyo, Hong Kong, and Seoul declining, while Shanghai, Sydney, Singapore, Wellington, Taipei, and Manila recorded gains.
“The hawkish stance from Powell wasn’t unexpected, given the persistent inflationary pressures, the strong state of the US economy, and the Fed’s commitment to data-driven decision-making,” remarked Stephen Innes of SPI Asset Management. “Anything less than reaffirming the ‘higher for longer’ stance would likely have raised doubts about the Fed’s credibility.”
Traders remained vigilant regarding developments in the Middle East after Israeli Army Chief General Herzi Halevi warned of a response to Iran’s attack on Saturday, heightening concerns about a broader regional conflict.
Tehran stated that the attack was in retaliation for a strike on the consular annex of its Damascus embassy, which resulted in the death of seven Revolutionary Guards, although it indicated that the matter could be considered closed.
Despite tensions, trading activity remained relatively calm on Wednesday, with oil prices inching down despite crises in the Middle East, Ukraine, and OPEC output cuts.
“Our base scenario is one where tensions remain contained in the Middle East, avoiding a broader conflict that disrupts oil supply,” commented Han Zhong Liang of Standard Chartered.
– Key figures around 0250 GMT –
Tokyo – Nikkei 225: DOWN 0.2 percent at 38,404.45 (break)
Hong Kong – Hang Seng Index: DOWN 0.5 percent at 16,176.21
Shanghai – Composite: UP 1.1 percent at 3,038.92
Dollar/yen: DOWN at 154.65 yen from 154.72 yen on Tuesday
Euro/dollar: UP at $1.0634 from $1.0622
Pound/dollar: UP at $1.2439 from $1.2426
Euro/pound: UP at 85.48 pence from 85.45 pence
West Texas Intermediate: DOWN 0.5 percent at $84.90 per barrel
Brent North Sea Crude: DOWN 0.5 percent at $89.59 per barrel
New York – Dow: UP 0.2 percent at 37,798.97 (close)
London – FTSE 100: DOWN 1.8 percent at 7,820.36 (close)
