Asian Markets Tumble as Central Banks Signal Higher Rates

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Yen Nears 150 per Dollar amid Intervention Fears

Asian shares fell on Monday, dragged by China, after central banks last week reinforced the message that interest rates would stay higher for longer, while investors braced for inflation data from the U.S. and Europe. The yen was jittery near the closely watched 150 per dollar level amid intervention fears, after the Bank of Japan made no change to its dovish monetary policy. Governor Kazuo Ueda is giving a speech and taking questions from 0130 GMT.

The Japanese currency has weakened by more than 10% against the greenback since the start of the year, as the U.S. economy outperformed its peers and the Fed signaled a faster pace of rate hikes. Some analysts have speculated that the Japanese authorities may intervene to stem the yen’s slide, which could hurt the country’s export competitiveness and inflation outlook.

However, others have argued that the BOJ is unlikely to act unless the yen falls below 150, a level that has not been breached since 1998. They also pointed out that the BOJ has other tools to support the economy, such as expanding its asset purchases or cutting its negative interest rate further.

Chinese Shares Retreat on Property Fears, Pre-Holiday Caution

Chinese shares fell after a rebound on Friday, as property concerns and pre-holiday caution weighed. The blue chips index eased 0.5% and Hong Kong’s Hang Seng index slumped 1.2% as Chinese property developers dived more than 3%.

Asian Markets Tumble as Central Banks

Evergrande, the embattled developer, said late on Sunday it was unable to issue new debt due to an ongoing investigation into its main domestic subsidiary, Hengda Real Estate Group Co Ltd, the latest trouble in firming up a debt restructuring plan. The company faces a $83.5 million bond coupon payment due on Monday, which it has not confirmed whether it will make or not.

S&P on Monday lowered its forecast for China’s economic growth to 4.8% in 2023 from 5.2%, and to 4.4% in 2024 from 4.8%, saying the fiscal and monetary easing had remained limited. “Policymakers’ emphasis on containing leverage and financial risks has increased the bar for macro stimulus,” said Louis Kuijs, Asia-Pacific chief economist.

Markets will be looking for clues on whether China’s economy is regaining traction, with a week-long national holiday set to begin on Friday that will be a key test for consumer spending. The big test in the week ahead would be the manufacturing and services PMIs on Saturday.

Global Bond Yields Rise as Fed Turns Hawkish

Bond investors were still smarting from the U.S. Federal Reserve’s more hawkish rate projections, which caught markets by surprise. Coupled with the recent resilience in the U.S. economy, markets now see about a split chance that the Fed would resume hiking in December, while drastically scaling back rate cut expectations to just 65 basis points next year.

The 10-year U.S. Treasury yield rose to 2.95%, the highest level since July 2021, while the 2-year yield climbed to 1.75%, the highest level since March 2020. The yield curve, which measures the gap between short- and long-term rates, flattened to 120 basis points, the lowest level since August 2020.

The higher U.S. yields also boosted the dollar, which rose to a 10-month high against a basket of major currencies. The greenback gained against the euro, the pound, the Swiss franc, and the Australian and New Zealand dollars.

Investors will be watching the U.S. inflation data for September, due on Wednesday, which is expected to show a 5.3% annual increase in consumer prices, unchanged from August. The core inflation, which excludes food and energy, is forecast to ease slightly to 4.0% from 4.3%.

The inflation figures will be followed by the U.S. personal income and spending data for September, due on Friday, which will include the Fed’s preferred inflation gauge, the core PCE price index. The index is expected to rise 3.6% year-on-year, above the Fed’s 2% target.

Europe will also release its inflation data for September, due on Friday, which is expected to show a 3.4% annual increase in consumer prices, the highest level since 2008. The core inflation, which excludes energy, food, alcohol and tobacco, is forecast to rise 1.9%, the highest level since 2012.

European Shares Set to Open Lower

Europe is set for a subdued open, with EUROSTOXX 50 futures off 0.3%. S&P 500 futures, however, rose 0.3% while Nasdaq futures gained 0.4%, after Hollywood’s writers union reached a preliminary labor agreement with major studios.

The deal, which averted a potential strike that could have disrupted the production of movies and TV shows, included higher pay, better health benefits, and more residuals for streaming platforms.

The U.S. stock market closed lower on Friday, as investors digested the Fed’s hawkish stance and the looming debt ceiling deadline. The S&P 500 fell 0.2%, while the Nasdaq dropped 0.5%. The Dow Jones Industrial Average, however, edged up 0.1%, boosted by energy and financial stocks.

The U.S. Congress has until October 18 to raise the debt limit, or risk a default that could trigger a financial crisis. The Democrats and the Republicans have been locked in a standoff over the issue, with the latter refusing to cooperate unless the former agree to cut spending.

The U.S. economic calendar for the week ahead also includes the final reading of the second-quarter GDP, due on Thursday, which is expected to confirm a 6.6% annualized growth rate. The consumer confidence index for September, due on Tuesday, is expected to improve slightly to 115.0 from 113.8 in August.

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