Fed leaves door open to further tightening

Fed officials see inflation 'upside risks'

By Ahmed Azzam | @3zzamous | 17 August 2023

  • Asian stocks dip, echoing Wall Street's fall, influenced by China's weakness and potential US rate hikes.

  • Australian dollar weakens on higher-than-expected July unemployment.

  • Federal Reserve minutes highlight divided views on inflation risks, hinting at possible tighter policies.

Asian equities faced a downward trajectory in tandem with US Treasuries as investors grappled with fresh indicators of vulnerability in China's economy, coupled with the looming specter of elevated US interest rates. Following a dip on Wall Street, shares in Japan, Australia, and South Korea mirrored the sentiment, underscoring concerns in the region. Nevertheless, Chinese stocks managed to trim their initial losses, fortified by the resilience displayed by technology stocks. This shift in sentiment dragged a comprehensive equity gauge to levels reminiscent of March, a plunge positioning it for the most substantial two-day descent since the preceding October. In Europe, stock futures took on a somber hue, pointing towards further market retreats.

The Australian dollar sustained its eighth consecutive decline, following the revelation of data indicating that the nation's unemployment rate burgeoned beyond projections in July. The pound, on the other hand, arrested its decline after a robust Wednesday surge triggered by UK inflation data surpassing expectations.

Fed may not be done with rate hikes

The recently unveiled minutes from the latest meeting unveiled significant nuances within the policy-making circles. Predominantly, a consensus emerged regarding the elevation of risks pertaining to inflation, implying that more assertive monetary policy measures might be indispensable. However, a subset of participants remained cautious about the potential detrimental ramifications of excessively aggressive rate hikes on the broader economy. With the collective acknowledgment of the increasing uncertainties prevailing, the meeting reaffirmed its reliance on upcoming data over the next few months to clarify the course of the process of reining in inflation. The Fed, in July, raised 25 basis points, bringing the federal funds rate to a range of 5.25%-5.5%, a peak not reached since January 2001.

The 10-year Treasury yield embarked on a path last traversed in October, persisting with the sell-off momentum that emerged on Wednesday. Additionally, the yield on two-year notes, particularly sensitive to policy shifts, lurched towards the 5% mark. This concerted selling exertion nullified the year's gains for a comprehensive index of US government debt.

Buoyed by the Federal Reserve's July meeting minutes, which sparked apprehensions of an ongoing interest rate upswing to curb inflation, the dollar exhibited remarkable vigor. This prevailing sentiment is seamlessly converging with this month's prevailing playbook, where investors are unloading both Treasuries and emerging market assets on the basis of expectations that policy rates are destined to remain elevated for an extended duration.