Asian markets rise as Fed delivers first rate hike since pandemic, dollar strengthens
Asian stock markets edged higher Thursday as investors welcomed the Federal Reserve's first interest rate increase in more than three years, viewing the move as a decisive step toward containing inflation that has roiled global financial markets.
The Fed raised rates by a quarter percentage point Wednesday, marking its first hike since December 2018, when rates reached 2.25-2.50 percent before subsequent cuts in 2019 and emergency reductions to near-zero in March 2020 during the COVID-19 pandemic. The unanimous decision included guidance suggesting one additional rate hike this year, prompting Goldman Sachs to predict the next move could come as soon as October.
MSCI's broadest index of Asia-Pacific shares outside Japan, which tracks large and mid-cap equity performance across 11 developed and emerging markets in the region, advanced 0.4 percent. Japan's Nikkei climbed 0.5 percent, while Chinese blue-chips slipped 0.4 percent and Hong Kong's Hang Seng declined 0.9 percent. US futures pointed to a positive opening, with Nasdaq futures up 0.6 percent and S&P 500 futures gaining 0.5 percent.
Dollar surges as short-term yields jump
The US dollar rallied to a seven-week peak against major currencies, supported by a sharp increase in short-term Treasury yields as markets priced in the possibility of additional rate hikes. Futures now indicate a 50 percent probability of another increase next month, with three total rate rises expected during this tightening cycle.
Two-year Treasury yields held at 4.71 percent after spiking 6 basis points overnight to their highest level since July 2024. The dollar index reached 100.33 after surging 0.7 percent.
The Treasury yield curve exhibited a bear flattening pattern, where short-term rates rise faster than long-term rates, typically associated with central bank tightening and expectations of slowing economic growth. This movement has drawn particular attention from analysts because yield curve inversions, where short-term rates exceed long-term rates, have preceded the last seven US recessions since 1969.
Benchmark 10-year Treasury yields stabilized at 4.99 percent, staying below the psychologically significant 5 percent threshold, while 30-year bond yields eased 2 basis points to 5.33 percent, pulling back from a 19-year high of 5.4 percent.
Fed targets 2 percent inflation goal
The Federal Open Market Committee, the Fed's monetary policy-making body consisting of 12 members including seven Board of Governors members and five Reserve Bank presidents, emphasized its commitment to returning inflation to the 2 percent target formally adopted in January 2012 as part of the Fed's dual mandate to promote maximum employment and stable prices.
Goldman Sachs analysts stated in a research note that October represents the most likely timing for the next rate increase.
We think October is the most likely time for the next move because it is most natural to deliver hikes that the FOMC presented today as supporting 'a timelier return' to the 2 percent target at consecutive meetings
Fed Chair Warsh expressed satisfaction that market reactions demonstrated moderating inflation expectations, according to ING's regional head of research for the Americas, Padhraic Garvey.
It was still an eloquent performance. But it won't rescue the back end of the curve. We identify 5.25 percent as a next target for the US 10-year yield
Central bank decisions loom
Attention now turns to the Bank of England, widely expected to maintain current interest rates in its policy announcement later Thursday. Market participants will scrutinize any signals about whether elevated energy costs might force a rate hike in November.
The Bank of Japan is virtually certain to raise interest rates Friday, continuing its policy normalization after maintaining negative rates from January 2016 until March 2024, when it raised rates to 0-0.1 percent, ending the world's only negative rate policy.
Commodities retreat on rate concerns
Commodity markets faced headwinds from the strengthening dollar and rising rates. Brent crude futures fell 0.7 percent to $105.05 per barrel after declining 2.7 percent overnight. The drop came as Saudi Arabia, the world's largest oil exporter with daily exports averaging 7-8 million barrels, reportedly offered crude cargoes through Oman, easing concerns about Middle East supply disruptions. Current prices remain well below the $130 per barrel peak reached in March 2022 following Russia's invasion of Ukraine.
Gold demonstrated resilience despite typically falling when interest rates rise due to increased opportunity cost of holding non-yielding assets. The precious metal gained 1 percent to $4,305 an ounce, offsetting a 0.7 percent decline the previous session. The counter-trend movement suggests inflation concerns and safe-haven demand are offsetting the negative impact of higher rates.
