HONG KONG, CHINA – Asian stocks tumbled again on Friday after another round of strong US data reinforced expectations the Federal Reserve will resume its interest rate hikes as officials wrestle with stubbornly high inflation.
After a strong start to the week fueled by signs that US prices were stabilizing, regional markets have taken a turn for the worse as traders come to terms with an extended period of central bank policy tightening.
Minutes from the Fed’s last meeting showed officials plan to ramp up borrowing costs again this month, having paused for the first time in more than a year in June, dealing a blow to hopes it was at or near the end of its cycle.
That came as Chinese figures confirmed that the recovery of the world’s number two economy had run out of steam, just months after the lifting of painful zero-Covid measures.
And equity-buying sentiment was hammered again on Thursday by news that US private firms created twice as many jobs as expected in June, while the crucial services sector saw solid growth.
The readings pointed to an economy that remained in rude health, even after 10 straight interest rate hikes, and analysts said it solidified bets on a July hike at least.
Treasuries yields spiked on the news, with two-year notes just below five percent, having hit a 16-year high at one point, while 10-year bonds passed four percent. The higher rate for shorter-term Treasuries is seen as a signal of a looming recession.
Investors are now girding themselves for the release later Friday of closely watched non-farm payrolls figures, which are used as a guide to the state of the economy and could provide some clues about the Fed’s plans.
All three main indexes on Wall Street sank Thursday, while European equities suffered their worst day since the US regional banking crisis in March.
Asia fared no better on Friday, with Tokyo losing more than one percent along with Sydney, Seoul and Manila, while Shanghai, Singapore, Taipei, Mumbai and Jakarta also dropped.
Hong Kong was down but pared the morning’s hefty losses after a report said Chinese officials were close to announcing a fine for Alibaba fintech affiliate Ant Group, possibly as soon as Friday.
The move would likely bring an end to years of investigations into the firm and allow it to return to business – and possibly revive its cancelled Initial Public Offering plan.
London, Paris and Frankfurt extended their Thursday losses in the morning session.
SPI Asset Management’s Stephen Innes warned the longer the data pointed to a strong economy, the longer the Fed would turn the screws.
“As the growth trajectory of the US economy improves, it becomes increasingly more challenging to envision what would cause the Fed to cut rates anytime soon, as many market participants have been anticipating,” he said in a note.
“If the US achieves a soft landing of its economy – especially if growth reaccelerates and inflation remains mute – the Fed may be more likely to simply pause its rate hiking cycle until it is sure that inflation does not accompany any growth re-acceleration.”
But Michael Hewson at CMC Markets added, “Having misread the resilience of inflation on the way out of the Covid crisis, there is this real sense that central bankers could make the same mistake on this side of the crisis and overtighten as inflation comes down.”
Traders are keeping tabs on China, where US Treasury Secretary Janet Yellen is on a four-day visit for talks with top policy officials aimed at smoothing strained ties between the economic superpowers.
A Treasury official said on Friday that Yellen had a “substantive conversation” with her previous counterpart, former vice premier Liu He, as well as the outgoing governor of China’s central bank, Yi Gang.
“They discussed the global economic outlook as well as the respective economic outlooks for the United States and China,” the official added.
Yellen is set to meet Premier Li Qiang later in the day.
The meetings come as China battles to kickstart torpid growth and on Thursday, Li pledged to “spare no time” pushing through specific policies, though analysts said promises of action in recent months have come to little.