Asian equities drop as Fed minutes cause fresh rate hike woe

HONG KONG — Markets dropped in Asia on Thursday following a sell-off in New York spurred by minutes from the Federal Reserve (Fed) indicating officials intended to keep lifting interest rates to tackle decades-high inflation.

While policymakers said they would eventually have to start tempering their tightening pace, they said they would keep borrowing costs elevated "for some time", though 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 was coming down.

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

But the realisation that policy would likely stay restrictive undermined the sense of optimism, pushing all three indexes on Wall Street down Wednesday with the tech-heavy Nasdaq taking the biggest hit, while the dollar rallied and extended gains in Asia. 

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

Asian traders appeared increasingly worried that the Fed will slip up as it tries to bring down inflation without causing another recession in the world's biggest economy.

Tokyo, Hong Kong, Sydney, Shanghai, Seoul, Taipei, Mumbai, Wellington and Bangkok were down, though Singapore, Manila and Jakarta edged up. 

London fell in the morning while Frankfurt and Paris rose.

"The key takeaway from these minutes would appear to show that there is little inclination on the part of anyone on the [policy board] to even look at the possibility of rate cuts," said Michael Hewson at CMC Markets.

He added that they "chime with more recent comments from Fed officials which suggest that we could see at least another 1.5 per cent in rate rises by year end".

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 and as the country reels from COVID-19 lockdowns.

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

But 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".