Marketmind: Rates Start to Bite

By Jamie McGeever

(Reuters) – A look at the day ahead in Asian markets from Jamie McGeever.

Asian stocks on Tuesday come off the back of their worst day since June hoping for recovery, but vulnerable to an expected interest rate hike in Australia, potentially critical comments from Fed Chair Jerome Powell and deepening U.S.-Sino tensions.

Another close in the red for Wall Street on Monday won’t boost the likelihood of a rebound much either, as U.S. markets lurch to price in a ‘higher for longer’ Fed this year.

The pick of the Asian economic data and events calendar will be the Reserve Bank of Australia’s rate decision and subsequent guidance from policymakers.

The RBA is expected to deliver a fourth consecutive quarter-point interest rate hike to 3.35%, after inflation unexpectedly rose last year to a 33-year high of 7.8%.

However, figures on Monday showed retail sales are falling for the first time in a year, a sign that higher rates are maybe starting to bite.

In Japan, meanwhile, speculation on the next Bank of Japan governor is intensifying. According to the Nikkei newspaper, Japan’s government has sounded out BOJ Deputy Governor Masayoshi Amamiya to succeed Haruhiko Kuroda.

Many analysts see him as a pragmatic policymaker who will prefer tip-toeing toward any exit from the BOJ’s ultra-loose monetary policy rather than make sudden changes to a stimulus program he helped create.

And the yen is on the slide. It fell 1% on Monday and is down 3% since Friday, its biggest two-day fall in three years.

Yen vs dollar 2-day change: https://tmsnrt.rs/3jEdowD

Generally speaking, Asian markets are feeling the heat from the sudden U.S. interest rate outlook shift following January’s freakishly strong U.S. jobs report released on Friday.

The Fed’s implied ‘terminal’ rate in June is now well above 5.00%, the implied year-end rate is higher than current the fed funds range, markets are now pricing in only 20 basis points of easing this year and the two-year yield has spiked around 40 basis points.

This may be the tightening of financial conditions Fed Chair Powell and his colleagues are seeking. Or they may be irrational and unjustified market swings in response to one data point that will prompt a response from Powell when he speaks at the Economic Club of Washington on Tuesday.

The MSCI Asia ex-Japan index slumped 2.4% on Monday, its worst day since June last year, Chinese stocks had their worst day this year (blame Beijing-Washington tensions too) and Hong Kong tech stocks fell 3.6%.

Here are three key developments that could provide more direction to markets on Tuesday:

– Fed Chair Powell speaks (Economic Club of Washington)

– Australia interest rate decision

– China FX reserves (January)

(By Jamie McGeever; Editing by Josie Kao)