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Asian markets drop as Fed minutes cause fresh rate hike woes

Tokyo, Hong Kong, Sydney, Shanghai, Seoul, Taipei, Wellington and Manila were all down

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On Thursday, markets dropped in Asia, following a sell-off in New York spurred by minutes from the Federal Reserve, indicating that officials intended to keep lifting interest rates to tackle the decades-high inflation.

While policymakers said they would eventually have to start tempering their tightening pace, they also said that they would keep borrowing costs elevated "for some time". They also, however, admitted there was a risk of going too far and damaging the economy.

The minutes dampened hopes that after a period of quick, sharp increases this year, the bank could possibly begin lowering them in 2023, once inflation begins coming down.

Bets on a more dovish approach in the new year had been boosted by data showing that inflation came down quicker in July than expected. That helped drive a rally in equities from their June lows, and weighed on the dollar.

However, the realisation that policy would likely stay restrictive undermined the sense of optimism, pushing all three indexes on the Wall Street down on Wednesday — for the first time in four days with the tech-heavy Nasdaq taking the biggest hit.

News that UK inflation spiked above 10 per cent for the first time since 1982, added to the downbeat mood.

In Asia, traders appeared increasingly worried that the Fed would slip up in its attempts to bring down inflation, without causing another recession in the world's biggest economy.

Tokyo, Hong Kong, Sydney, Shanghai, Seoul, Taipei, Wellington and Manila were all well down.

"While the ... minutes continue to emphasise the need to contain inflation, there is also an emerging concern the Fed could tighten more than necessary," said Christopher Low of FHN Financial.

"There is an inkling of improvement on the supply side of the economy, there is a bit of hope in some product prices moderating, but there is still a great deal of concern about inflation and inflation expectations," he added.

JP Morgan Asset Management's Meera Pandit told Bloomberg Television:

"We do still anticipate there's going to be a lot of interest-rate volatility in the back half of the year, especially once markets start to perhaps acknowledge the fact that we might not necessarily see cuts in 2023 that are being priced in."

Sentiment was also dragged by continuing worries about China's economy, with Goldman Sachs and Nomura slashing their growth outlooks again, following another weak round of data, as well as the country grappling with Covid-19 lockdowns.

The announcements came after Beijing cut interest rates in a surprise move on Monday, before Premier Li Keqiang called on six key provinces — accounting for about 40 per cent of the economy — to bolster pro-growth policies.

Nomura economists said that while officials will likely unveil further measures, "rolling out a comprehensive stimulus package is of low probability in a year of government reshuffle, while the need for maintaining zero-Covid makes conventional stimulus measures much less effective".

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