MSCI’s broadest index of Asia-Pacific shares outside Japan dropped nearly 0.6% to its lowest level since late May, Nikkei dropped 1%, while S&P 500 futures fell 0.4% in Asian trade
Asian equities hit a three-week low on Thursday as the Fed signalled it might raise interest rates at a much faster pace than assumed. This sent bond yields and the dollar sharply higher.
The dollar recorded its strongest single day gain in 15 months as 10-year U.S. Treasury yields climbed by the most since early March.
The fallout in equities sent MSCI’s broadest index of Asia-Pacific shares outside Japan down nearly 0.6% to its lowest level since late May.
Japan’s Nikkei dropped 1%, while S&P 500 futures fell 0.4% in Asian trade.
The new Fed ‘dot plot’ indicating that the median FOMC member now forecasts two Fed rate hikes in 2023, versus none in the March iteration, represented the hawkish surprise out of the June Fed meeting, said Ray Attrill, head of FX strategy at NAB.
The Fed forecasts, or dot plots, showed 13 of the 18 person policy board saw rates rising in 2023 versus only six previously, while seven tipped a first move in 2022. While the plots are not commitments and have a poor track record of predicting rates, the sudden shift was still a shock.
The move by the Fed further surprised the market by signalling it would now be considering whether to taper its asset purchases meeting by meeting and downgraded the risk from the pandemic given progress in vaccination.
Analysts at JPMorgan noted Fed Chair Jerome Powell was not much aggressive in his media conference.
It appears that faster progress toward reopening and higher inflation surprises revealed some hawks on the FOMC, but we suspect that leadership is predominantly anchored at zero or one hike in 2023, they said in a note.
We continue to look for lift-off in 2023, with tapering starting early next year, the said.
Markets moved quickly to price in the risk of earlier action and Fed fund futures shifted to imply a first hike by the end of 2022. Yields on 10-year bonds shot up almost nine basis points to 1.57%.
The dollar rose from its recent tight ranges, gaining 0.9% overnight against a basket of currencies to 91.387 for its biggest gain since March last year.
The euro was at five-week lows of $1.1990 having dropped 1.1% overnight, the sharpest decline since March 2020. The dollar also surged to 110.69 yen and looked set to test its 2021 peak at 110.96.
However the kiwi clawed back about half of its overnight losses after Q1 growth figures blew past forecasts.
The Australian dollar and emerging market currencies stabilised.
Gold took a blow as it dropped to $1,821 an ounce after declining 2.5% overnight.