Asian stocks 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.
China weighs on Asian markets
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%. 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.
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.
Yen nears 150 per dollar amid intervention fears
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 yen has been under pressure as the U.S. dollar has strengthened on expectations of higher interest rates and faster tapering of bond purchases by the Federal Reserve. The yen has also been hurt by Japan’s weak economic performance and political uncertainty ahead of a general election next month.
Some analysts have warned that the Japanese authorities may intervene in the currency market to stem the yen’s decline, which could hurt the country’s export competitiveness and inflation outlook. However, others have argued that intervention is unlikely given Japan’s close ties with the U.S. and its commitment to refrain from competitive devaluation.
Bond rout continues as Fed signals rate hikes
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.
“What’s driven the move this year is the acceptance that inflation shock isn’t transitory, but is going to require restrictive monetary policy for much longer than we first thought,” said Andrew Lilley, chief rates strategist at Barrenjoey. “For bonds to rally globally, we’re going to need a coordinated rate cutting cycle, particularly from the Fed. Personally I don’t see the Fed cutting in 2024, so I don’t think that 2024 will be a particularly good year for bonds either.”
Ten-year Treasury yields inched up 2 basis points to 4.4580% on Monday, after retreating from a 16-year high of 4.508% on Friday. Two year yields were little changed at 5.1162%, having fallen from a 17-year top of 5.2020% hit last week.
Much will depend on U.S. data this week, especially the core personal consumption expenditures (PCE) price index for August due on Friday, which is the Fed’s preferred inflation gauge. Analysts expect it to rise 0.3% month-on-month and 3.6% year-on-year, slightly lower than July’s figures.
In Europe, inflation data for September will also be closely watched, as the European Central Bank has signaled that it may start tapering its bond purchases soon.
