Asian stocks fell, Treasury yields climbed and global currencies lost ground against the dollar on Monday as investors took fright following hawkish comments from Federal Reserve chair Jay Powell.
Japan’s benchmark Topix led markets lower with a drop of almost 2 per cent as trading got under way in Asia, while South Korea’s Kospi shed 2.2 per cent. Hong Kong’s Hang Seng stock index lost 0.7 per cent.
Policymakers have warned that the global economy is facing its greatest challenge in decades as central bankers attempt to tame high inflation. Gita Gopinath, the IMF’s deputy managing director, told the Financial Times at the weekend that “monetary policymaking is going to be much more challenging” in the next five years as officials grapple with “most costly trade-offs”.
The falls for Asian equities followed a punishing session for shares on Wall Street on Friday, when the S&P 500 closed down 3.4 per cent and the technology-focused Nasdaq Composite dropped almost 4 per cent.
Those were the largest declines for both US stock benchmarks in more than two months and followed on the heels of comments from Powell during a speech at the annual gathering of central bankers in Jackson Hole, Wyoming. He asserted the Fed “must keep at it until the job is done” on taming surging inflation through repeated interest rate rises.
“Restoring price stability will likely require maintaining a restrictive policy stance for some time,” Powell added. “The historical record cautions strongly against prematurely loosening policy.”
The impact of Powell’s speech reverberated through global markets on Monday, with yield on the policy-sensitive two-year US Treasury note rising 0.07 percentage points to 3.466 per cent — the highest level since 2007 — on firmer expectations of higher rates to come.
“Officials remain strongly committed to returning inflation to the central bank’s 2 per cent target, “said Mansoor Mohi-uddin, chief economist at Bank of Singapore. “We think the chances of a 0.75 percentage point move next month have risen and will watch August’s US payrolls and consumer inflation data closely.”
Renewed promises of rate increases from central bankers in Jackson Hole also hit foreign exchange markets, with Japan’s yen dropping 0.8 per cent to ¥138.66 against the dollar, compounding losses for traders in Tokyo.
In European currencies, sterling fell 0.8 per cent to $1.166, its lowest level against the greenback since the early days of the Covid-19 pandemic, as investors reacted to a forecast from Goldman Sachs. The US bank’s analysts predicted that the UK would enter a recession in the fourth quarter of 2022 and cut annual economic growth expectations to 3.5 per cent, from 3.7 per cent previously.