SEOUL – The storm took a weekend to cross the Pacific, but it made landfall nonetheless: On Monday (August 29), Asian markets were hit by the same tempest that pummeled US markets late Friday.
On that day, US Federal Reserve Chairman Jerome Powell had shifted the tectonic plates in a highly-anticipated speech to central bankers in Jackson Hole, Wyoming, where he signaled to markets that the Fed would continue raising interest rates.
“Restoring price stability will likely require maintaining a restrictive policy stance for some time,” Powell told the Friday huddle, attended by senior policymakers. “The historical record cautions strongly against prematurely loosening policy.”
Powell has been critiqued for responding too late to inflation data; some critics believe he is now over-balancing too far in the opposite direction. These criticisms have led to differences between market watchers on which way the Fed would – or should – move.
July US inflation and jobs data had shown improvements, leading to some expectations that the Fed might ease off in August. Pundits’ expectations had been roughly even on which way he would jump.
In the event, it was the optimist’s hopes that were dashed. Powell “went for the jugular, conveying (an) unflinching assault on inflation,” Vishnu Varathan, head of economics and strategy at Mizuho Bank, said.
Investors fear that if economic growth falters, higher interest rates will increase the likelihood of a much-feared US recession.
That, together with a slowing, lockdown-wracked China and the ongoing impacts of the Ukraine war would have dire global consequences. That there is pain to come is evident: Powell himself conceded that the Fed’s moves to rein in domestic inflation would, indeed, cost American households and businesses.
The Fed chairman’s talk drove the two main New York boards down by 3% on Friday. The follow-on results after the weekend had been widely predicted.
Powell was “really hawkish,” Manish Bhargava, a Straits Investment Holdings fund manager in Singapore warned Business Times prior to the opening of markets today. He predicted “a lot of red on Monday” in Asia as money exited eastern markets.
And so it proved.
With the US dollar hitting 20-year highs against other major currencies on Monday, both stocks and currencies in Japan and South Korea, two manufacturing powerhouses that are acutely sensitive to global and especially US movements, were hit after a volatile day of trading.
Japan’s Nikkei closed down 2.66% on Monday, while South Korea’s benchmark KOSPI main board was down 2.18% today.
The yen weakened from 137.7 at the opening of business to 138.75 at close. Market gossip is that the yen will broach the 140 level in September. The dollar is up 10% this year, while the yen is down 16%, putting it at the bottom of the G10’s currencies and with the Bank of Japan still in easing mode.
The South Korean won sank to 1,350 against the US dollar, before recovering (just) to 1,349.
That was a psychological red line: It was the first time that the won had slid below the 1,340 level in intraday trading since April 2009.
In Seoul, Deputy Finance Minister Bang Ki-sun suggested that he and his colleagues were getting the interventionist itch.
“As South Korea’s financial market is deeply coupled with movements in US and other major markets, there is a need for close monitoring and responses,” he said today, according to Yonhap News.
But Seoul has been in tightening mode all year. Bigger questions hover over Beijing and Tokyo, which are on the opposite track.
“The Bank of Japan and the Peoples Bank of China are the only two major central banks not in a tightening part of the cycle,” FX News noted today. “Forty-year peaks in inflation are the trigger for higher rates elsewhere.”
The publication of updated jobs and inflation data will precede the next Fed rate-setting meeting in September.
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