MSCI’s Asia-Pacific equity index advanced for the first time in six days, paced by tech stocks in Hong Kong, where the benchmark Hang Seng Index rose more than 1%. Japan’s Nikkei 225 earlier jumped by around the same amount after traders returned from a holiday. S&P 500 and Nasdaq 100 futures edged higher.
Treasury 10-year yields hovered near 3.5% while yields on the more policy-sensitive two-year rate hit the highest since 2007 and are poised to crack above 4%, amid fears that an over tightening of monetary settings raises the odds of a hard landing.
Investors are on tenterhooks as they await policy decisions that are expected to bring hefty rate hikes from the US, UK and Sweden. Decisions are also due in Japan, Switzerland, Indonesia, Norway and the Philippines, among others.
The dollar was little changed below recent highs, while the yen was held comfortably below the key 145 level. The yuan was on the weak side of 7 versus the dollar.
Traders are betting the Fed will hike by 75 basis points on Wednesday, a signal rates are heading above 4% and will then pause. The long-hold strategy is rooted in the idea the central bank would avoid the disastrous stop-go policy of the 1970s that allowed inflation to get out of hand.
“We recognise that after this week’s hike the funds rate will be placed comfortably into ‘restrictive’ territory,” Kevin Cummins, the chief US economist at NatWest Markets, wrote in a note. “It seems reasonable that officials will continue to err on the side of doing too much rather than too little and keep front-loading.”
Swap contracts that forecast rates over the next two years now peak around 4.5% in March 2023 – a full point higher than was expected after the last meeting in July.
Strategists at JPMorgan Chase & Co estimate the Fed will increase rates to 4.25% by early next year. “We expect central bank tightening and a fading of supply chain pressures to moderate job growth and core inflation. In turn, we anticipate this will allow the Fed and other central banks to pause in 1H23,” strategists including Marko Kolanovic and Nikolaos Panigirtzoglou wrote in a note on Monday.
In China, banks kept their main lending rates unchanged after the central bank paused its monetary easing and defended a weakening yuan.
In a time-tested harbinger of an economic downturn, short-term US rates have exceeded yields on longer maturities for months. The MLIV Pulse survey, which drew 737 responses, showed that the bulk of contributors expect a deeper inversion. Some see it reaching levels last seen in the early 1980s, when Paul Volcker ratcheted up borrowing costs to break the back of hyperinflation. BM