SINGAPORE- Asian stocks braked around two-month highs on Thursday, while the dollar nursed modest losses, after the US Federal Reserve chose not to hike interest rates for the first time in 17 months, even if it opened the door to more hikes ahead.
The Fed left its benchmark funds rate window at 5-5.25 percent, and chair Jerome Powell said the US central bank needed to gather more information about the economy to determine what to do next.
Committee members surprised markets by projecting two more 25 basis point hikes this year, sending short-term US yields higher and closing out bets on any cuts in 2023.
The euro made a one-month peak after the decision at $1.0865 and now, at $1.0826, awaits a European Central Bank meeting later in the day where markets expect an eighth straight rate hike will take borrowing costs to two-decade highs.
The S&P 500 churned sideways overnight and futures slipped 0.1 percent in Asia. MSCI’s broadest index of Asia-Pacific shares outside Japan rose 0.2 percent, while Japan’s tearaway Nikkei paused for breath and was flat.
“The two projected hikes were viewed as hawkish initially,” said Steve Englander, head of G10 currency research at Standard Chartered in New York, but traders soon unwound that a bit as Powell struck a balanced tone in his news conference.
“The market takeaway was that rates would stay high for longer, rather than spike upwards in line with the shift in projected Fed funds rate.”
Two-year Treasury yields jumped as much as 13.5 bps in the session, before settling two bps higher at 4.69 percent. Ten-year yields fell 3 bps to 3.79 percent.
Fed funds futures pricing didn’t budge all that much, but expectations for a hike next month firmed a little and traders pushed any hopes for cuts deeper into 2024.
“The conditions we need to see … to get inflation down are coming into place,” Powell said. “But the process of that actually working on inflation is going to take some time.”
In Asia the focus was on China where industrial output and retail sales figures fell short of market forecasts in the latest sign the economic recovery isn’t living up to hopes.
