Massaging the message

A look at the day ahead in Asian markets from Jamie McGeever

If you shouldn’t judge a book by its cover, you definitely shouldn’t judge a central bank policy decision by the headline move (or otherwise) in interest rates.

In the past 24 hours the U.S. Fed and Bank of England have both raised rates by 75 basis points, but the messaging could not be more different.

The Fed’s move cemented the current tightening cycle as the most aggressive in 40 years, and Fed chief Jerome Powell’s comments made clear it was a hawkish hike. By contrast, the BoE’s biggest rate increase in 33 years was clearly a dovish hike.

Sterling sank 2% and was one of the world’s worst-performing currencies on Thursday, while the greenback rallied strongly across the board to back toward its recent 22-year high.

The last thing Asian markets need is another whoosh higher in the dollar and Treasury yields. But that’s exactly what they’re getting as U.S. markets reprice for a “higher for longer” Fed – the 2023 terminal rate is now well above 5%, and the lowest implied rate late next year is a punchy 4.80%.

The U.S. jobs report for October on Friday, especially sticky wage growth, could ensure markets end the week firmly on the back foot.

Wall Street took another beating on Thursday, Asian and world stocks are feeling the heat again, and global financial conditions are tightening. The challenge this poses for all central banks is immense.

Hong Kong, with its currency effectively tied to the U.S. dollar and economy inextricably linked to China, is in a particularly tight spot.

Hong Kong interbank rates are moving sharply higher than equivalent U.S. and Chinese rates, which might support the currency but spell bad news for an economy that shrank 4.5% in Q3. Testing times for the HKMA.

Three key developments that could provide more direction to markets on Friday:

U.S. non-farm payrolls (October)

Australia trade (Q3)

Euro zone PMIs (October)