by Wayne Cole
SYDNEY (Reuters) – Stock markets in Asia paused on Monday as investors braced for a week filled with 13 central bank meetings sure to see borrowing costs rise worldwide and some risks of a big rally in the United States.
Entire markets are already priced against the Fed’s 75 basis point rise, with futures showing an 18% chance of a full percentage point.
It also shows that 50-50 chance rates could rise to 5.0-5.25% as the Fed is forced to push the economy into recession to bring down inflation.
“How high should the rate of money eventually go up?” Jan Hatzius, chief economist at Goldman Sachs (NYSE:) said.
“Our answer is high enough to generate a tightening in financial conditions that puts a drag on activity enough to maintain a growth path well below potential.”
He expects the Fed to rise by 75 basis points on Wednesday, followed by two moves of half a point in November and December.
Also important is the Fed members’ “dot plot” expectations for potentially hawkish rates, putting the funds rate at 4-4.25% by the end of this year, and even higher next year.
Those risks saw two-year Treasury yields rise by 30 basis points last week alone to reach their highest level since 2007 at 3.92%, making stocks look more expensive compared to a decline of about 5% for the week.
Early Monday, holidays in Japan and the UK got off to a slow start and rose 0.1%, while Nasdaq futures were flat.
MSCI’s broadest index of Asia-Pacific shares outside Japan added 0.1%, after losing nearly 3% last week.
It was closed, but futures included an index of 27,335 compared to Friday’s close of 27,567.
Hike every round
Bank of America’s latest survey of fund managers suggests that allocations to global equities are at an all-time low.
“But with both US yields and the unemployment rate heading to 4-5%, bad sentiment is not enough to prevent the S&P from hitting new lows for the year,” Bank of America analysts warned in a note.
“Our set of 38 proprietary growth indicators depict a bleak outlook for global growth, yet we are staring at one of the most aggressive tightening periods in history, with 85% of global central banks in a tightening mode.”
Most banks’ meeting this week – from Switzerland to South Africa – is expected to pick up with markets divided over whether the BoE will go 50 or 75 basis points.
“The latest UK retail sales data supports our view that the economy is already in a recession,” said Jonathan Petersen, chief market economist at Capital Economics.
“So, even though sterling hit a new multi-decade low against the dollar this week, the relative strength of the US economy suggests to us that sterling will remain under pressure.”
The British Pound was stuck at $1.1436 after hitting a 37-year low of $1.1351 last week, [GBP/]
The strange man is the Bank of Japan which has so far shown no sign of abandoning its ultra-accommodative yield curve policy despite the sharp slide in the Yen.
The dollar settled at 142.78 yen on Monday, having retreated from the recent 24-year high of 144.99 in the face of increasingly sharp intervention warnings from Japanese policy makers.
The euro settled at $1.1021, having climbed from a recent low of $0.9865 thanks to increasingly hawkish comments from the European Central Bank.
Against a basket of currencies, the dollar settled at 109.60, far from a two-decade high of 110.79 touched earlier this month.
The dollar’s rally and yields were a drag on gold, which was hovering at $1,678 an ounce after hitting its lowest levels not seen since April 2020 last week. [GOL/]
Oil prices were trying to bounce back on Monday, having fallen about 20% so far this quarter on demand concerns as global growth slows. [O/R]
It rose 60 cents to $91.95, while it rose 55 cents to $85.66 a barrel.