Fed's hawkish stance weighs on investor sentiment

The RBA kept its cash rate unchanged at 4.1% during the first meeting under new Governor Michele Bullock.

By Ahmed Azzam | @3zzamous | 3 October 2023

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Morning
  • U.S. dollar continues to strengthen.

  • Hang Seng Index records a significant 3% drop.

  • Investors fret over the Federal Reserve's hawkish signals.

Asian stocks witnessed a substantial downturn today as investors grappled with the Federal Reserve's increasingly hawkish stance. The Hang Seng Index, returning from a long weekend, bore the brunt of the sell-off with a notable 3% decline, further fueling concerns that the central bank's tightening measures could reverberate across global markets. Simultaneously, futures markets in both the United States and Europe experienced modest declines, underscoring the growing unease among investors.

In the bond market, U.S. Treasuries managed to find some semblance of stability following an overnight surge in yields on 5- to 30-year notes, registering an approximately 10 basis point increase. This sudden and significant movement serves as a stark reminder of the fixed-income market's acute sensitivity to the Federal Reserve's messaging on interest rates and inflation expectations.

The U.S. dollar continued its ascent, fortified by the central bank's unwavering hawkish stance. The relentless strength of the greenback underscores the deepening divergence in global monetary policy trajectories, with the Fed primed for a tightening cycle while other major central banks maintain a more cautious approach.

Furthermore, Brent crude oil prices slipped below the critical $90 per barrel threshold, reflecting mounting concerns regarding potential demand erosion in the face of a more restrictive monetary environment.

Australia holds cash rate at Bullock's first meeting

The Australian dollar remained under pressure, retaining earlier losses. Concurrently, three-year bond yields retraced slightly after an initial uptick, underscoring the pervasive uncertainty shrouding the global economic outlook and the potential repercussions of central bank policies.

The Reserve Bank of Australia (RBA) announced its decision to keep its cash rate steady at 4.1% during the first meeting under the stewardship of new Governor Michele Bullock. This decision marked the fourth consecutive month of rate inaction, aligning with market expectations. The RBA, in its statement, reiterated concerns about elevated inflation levels, affirming that while inflation may have peaked, it still lingers uncomfortably high. The central bank issued a stark warning that further tightening measures may be necessary to bring inflation within its target range of 2 to 3% by late 2025.

Fed hawkish tone

Across the Pacific, the Federal Reserve sent clear signals of its intention to forge ahead with additional rate hikes this year, followed by an extended period of elevated interest rates. Loretta Mester, a member of the Federal Reserve's board, indicated a strong likelihood of another rate increase in the near term. In a similar vein, Michael Barr suggested that rates were "likely at or very near" a sufficiently restrictive level, raising questions about the extent of tightening required. Michelle Bowman also maintained her view that multiple rate hikes may still be necessary, highlighting the ongoing debate among policymakers regarding the central bank's monetary policy trajectory.

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