Asian shares were on track for their worst day in a month on Wednesday after hawkish comments from Federal Reserve Chair Jerome Powell raised the possibility of the U.S. central bank returning to large rate hikes to tackle sticky inflation.
MSCI’s broadest index of Asia-Pacific shares outside Japan was 1.69 per cent lower at 514.71, with the downbeat mood set to spill over to Europe. Europe’s Stoxx 600 share index slipped 0.3 per cent lower and futures markets indicated a steady start on Wall Street after the S&P 500 indexIn early trading, Britain’s FTSE 100 fell 0.28 per cent and France’s CAC 40 slid 0.28 per cent, while Germany’s DAX index rose 0.24 per cent.
“If the totality of the data were to indicate that faster tightening is warranted, we would be prepared to increase the pace of rate hikes,” he said. “He has given the Fed optionality, but one suspects he would be loath to do so as it is not a good look to change tactics when you’ve only just moved down to 25 basis points increments.”
A closely watched part of the U.S. Treasury yield curve measuring the gap between yields on two- and 10-year Treasury notes, seen as an indicator of economic expectations, was at -107.3 basis points, its deepest since August 1981, according to Refinitiv data. Such an inversion is seen as a reliable recession indicator.
Citi strategists said even as-expected payrolls and inflation data could keep the chance of a 50-basis-point hike high. “Not following through on a 50 bps increase could then entail an unhelpfully large easing of financial conditions.”