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Asia stocks fall, dollar stronger on Fed outlook: markets wrap

Asia stocks fall, dollar stronger on Fed outlook: markets wrap
Mine workers return their equipment to charging racks after a shift at the Gold Fields Ltd. South Deep gold mine in Westonaria on 12 October 2022. (Photo: Michele Spatar i /Bloomberg via Getty Images)

Shares in Asia were broadly lower on Thursday while the dollar strengthened further against major currencies as investors increased bets for further Federal Reserve policy tightening.

Equities in Australia, South Korea and China fell, with the latter weighed down by property developers, which partly retraced a rally in the prior session. Shares in Japan gave up early gains to trade flat.

The downward pressure followed a decline in US stocks on Wednesday. The S&P 500 fell 0.7% to close lower for a second day. The tech-heavy Nasdaq 100, which is more sensitive to interest-rate expectations, declined 0.9%. US futures edged lower on Thursday.

The Bloomberg dollar index rose to a fresh six-month high as investors increased expectations for the Fed to hike again this year. Treasury yields drifted higher across most of the curve on Thursday, extending Wednesday increases that pushed two-year yields above 5%. Australian bond yields followed on Thursday, edging higher.

The moves followed data from the Institute for Supply Management’s US services index, which in August reached 54.4, its highest monthly reading since February and one that topped all estimates in a Bloomberg survey of economists. A reading above 50 denotes growth.

Elsewhere, the People’s Bank of China set the so-called fixing at a stronger-than-expected level for a 54th straight day on Thursday, the longest since Bloomberg started the daily survey in 2018. The yen traded steady after earlier weakening following Japan’s stern warning about yen depreciation on Wednesday.

The BOJ is unlikely t0 intervene in currency markets until the yen gets closer to 150 versus the dollar, and even then, it won’t stop further weakness in the long-term, Ray Attrill, head of FX strategy for National Australia Bank Limited said on Bloomberg TV. Any weakness in the dollar will be largely dependent on “a recovery in China and a strengthening in the yuan — and that probably needs to be accompanied by a stronger Japanese yen,” he added.

Following a string of stronger-than-expected reports on everything from consumer spending to residential investment, economists have been boosting their forecasts for US gross domestic product. That marks a sharp turnaround from three months ago — the last time policymakers updated their own numbers — when the consensus view was that the economy would stall in the current quarter. 

And it may be enough to prompt Fed officials to scale back their estimates for rate cuts in 2024. Traders in recent months have trimmed bets on the degree of Fed easing they see next year — to about 100 basis points from well over 150 basis points early in 2023.

“The ISM Services Sector report underscores the resilience of the largest portion of the economy,” said Quincy Krosby, chief global strategist at LPL Financial, who pointed to higher prices shown within the data. “This is certainly not good news for a data-dependent Fed.”

Fed Bank of Boston president Susan Collins said policymakers will need to be patient as they assess economic data to figure out their next steps and that further tightening may still be required. Meantime, former Fed Bank of St. Louis chief James Bullard noted officials should continue to pencil in one additional hike this year when they update their projections later this month.

In Asia, China will release foreign reserves and trade data, while Malaysia is expected to keep rates on hold at 3%. Meanwhile, BOJ Board Member Junko Nakagawa says it’s appropriate to continue with monetary easing for the time being with an inflation target not achieved yet.

In commodities, oil edged lower to snap a run of nine daily advances – its longest winning run in more than four years. Gold edged higher after dropping on Wednesday.

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