How Powell’s Surprise Rate Signal May Rip Through Asia Stocks, Currencies

Asian assets face selling pressure after Federal Reserve Chair Jerome Powell jolted investors with unexpectedly aggressive comments on the outlook for higher interest rates.

08 Mar 2023, 12:12 PM IST

An electronic stock board inside the Kabuto One building in Tokyo, Japan, on Monday, Nov. 21, 2022. The world's central banks must keep raising interest rates to fight soaring and pervasive inflation, even as the global economy sinks into a significant slowdown, the OECD said. Photographer: SeongJoon Cho/Bloomberg

(Bloomberg) -- Asian assets face selling pressure after Federal Reserve Chair Jerome Powell jolted investors with unexpectedly aggressive comments on the outlook for higher interest rates.

Here’s how strategists see the impact rippling through Asia Wednesday following sharp moves during US trading: the dollar rallied 1%, stocks and commodities slumped and the US 2-year yield exceeded the 10-year one by a full percentage point.

Hebe Chen, analyst at IG Markets.

“For the Asian market, the Fed’s hawkish comments doused the recently ignited hope from RBA’s soft stance and South Korea’s new low inflation rate,” Chen said. “Equities will be under renewed pressure. In the mid- to long-term, the divergence between Fed and Asian central banks will likely see a further downtrend for the Asian currencies.”

Kellie Wood, deputy head of fixed income at Schroders Plc in Australia.

“A 6% terminal rate is not out of the question now,” said Wood. “Expect to see a broad-based selloff in Aussie and Asian markets today led by the short end but with US rates underperforming.”

John Bromhead, currency strategist at Australia & New Zealand Banking Group.

“Path of least resistance for USD/JPY is higher short-term as we see terminal pricing reset higher in the US,” said Bromhead. “We will get some clues on US labor market tonight (JOLTS + ADP) ahead of payrolls on Friday. I wouldn’t be fighting the USD trend ahead of that key release.”

Brendan McKenna, emerging markets strategist at Wells Fargo in New York.

“He was much more hawkish than markets expected, and I would expect that language to filter and ripple across into Asia as well,” said McKenna. “Higher-for-longer is becoming the base-case scenario, and if that scenario materializes, EM can suffer. Markets were really hoping for an early Fed pause and cuts this year, so far that scenario is not unfolding and EM giving back some its early gains.” McKenna added that “higher beta names like IDR and KRW” may face downward pressure, and while any selloff today could be a buying opportunity, “waiting for payrolls later this week might be most prudent.”

Anthony Doyle, head of investment strategy for Firetrail Investments.

“Local markets will take their lead from the weakness offshore today,” said Doyle. “The testimony confirmed the growing narrative that interest rate cuts may be some way off, and there is less and less likelihood that we will see any this year.”

Karen Jorritsma, head of Australian equities at RBC Capital Markets.

“It is clearly a step backwards for the markets given we had seen some comfort return after the last round when discussion appeared to be talking around an end in sight,” said Jorritsma. “This has raised uncertainty again and will rattle confidence.”

More stories like this are available on bloomberg.com