Concerns that the Federal Reserve will have to lift interest rates again or keep them at a 22-year high for an extended period weighed on investor sentiment Wednesday as traders awaited the US central bank’s latest policy decision.
While inflation has dropped from the eye-watering levels seen in the middle of last year, thanks to a long-running campaign on monetary tightening, a fresh spike in oil prices has caused a headache for officials as they try to bring prices under control.
The optimism that the Fed will be able to cut borrowing costs next year has evaporated over the summer as the US economy shows few signs of weakness and the labour market remains robust.
That has weighed on risk assets as traders contemplate a drawn-out period of high rates with tech firms, which rely on borrowing to fuel growth, among the hardest hit.
The Fed is widely expected to keep rates on hold Wednesday, but focus will be on the bank’s statement and boss Jerome Powell’s post-meeting comments, with traders hoping for an idea about its plans for the next few months and into the new year.
Policymakers are aiming to keep the United States on what Chicago Fed chief Austan Goolsbee called the “golden path”, attempting to temper inflation while averting a surge in unemployment and a major economic slowdown.
But Kathryn Rooney Vera, of StoneX, told Bloomberg Television: “Going into 2024 to really get inflation back to that two percent target, the Fed is at least going to have to hold for an extended period of time rather than cut.”
She added that the dollar, which is already well up against its peers, including a 10-month high versus the yen, “probably has a bit more upside”.
All three main indexes on Wall Street were in the red, and Asia followed on Wednesday.
Hong Kong, Tokyo, Shanghai, Sydney, Mumbai, Singapore, Wellington, Taipei and Bangkok all dropped.
London rose at the open while sterling weakened as data showed UK inflation unexpectedly slowed to an 18-month low in August.
Paris and Frankfurt rose.
Japan rate hint
A key concern for investors is the latest bounce in oil prices, with both contracts heading towards $100 a barrel, largely because of output cuts by Russia and OPEC kingpin Saudi Arabia, which will be in place until the end of the year at least.
Still, oil has retreated more than one percent over the past two days as the stronger dollar makes it expensive for buyers using other currencies.
In a sign of the work central banks around the world still face in taming prices, Canadian data showed the country’s inflation jumped more than forecast in July.
Traders will also be keeping an eye on policy decisions by central banks in Britain, Switzerland, Sweden and Norway.
The Bank of Japan is also in focus, with officials in Tokyo recently hinting it could begin drifting away from its long-running ultra-loose policy put in place to kickstart the economy.
Pressure has been building on officials to act as the yen continues to weaken and inflation pushes higher.
Ongoing weakness in the yen has led Japanese authorities to warn they stood ready to step into forex markets to support the unit, as they did in November when it hit a three-decade high above 150 per dollar.
Key figures around 0715 GMT
Tokyo – Nikkei 225: DOWN 0.7 percent at 33,023.78 (close)
Hong Kong – Hang Seng Index: DOWN 0.5 percent at 17,911.84
Shanghai – Composite: DOWN 0.5 percent at 3,108.57 (close)
London – FTSE 100: UP 0.6 percent at 7,703.11
Euro/dollar: UP at $1.0689 from $1.0681 on Tuesday
Pound/dollar: DOWN at $1.2356 from $1.2393
Dollar/yen: UP at 147.91 yen from 147.86 yen
Euro/pound: UP at 86.50 pence from 86.17 pence
West Texas Intermediate: DOWN 1.1 percent at $90.23 per barrel
Brent North Sea crude: DOWN 1.0 percent at $93.38 per barrel
New York – Dow: DOWN 0.3 percent at 34,517.73 (close)
