Asian markets shrug off rate hike as trade war threat looms

Analysts are watching the build-up of inflationary pressures in the US; rising expectations for three more rate hikes this year

Published Thu, Mar 22, 2018 · 09:50 PM


MARKETS in Asia closed mostly lower on Thursday, even as the Fed gave a stoic nod to the stronger US economy through a widely expected rate hike on Wednesday.

But market sentiment was weighed down by simmering threats of a trade war between the US and China.

The Straits Times Index closed down 19.76 points, or 0.56 per cent, to 3,491.37, while the Hang Seng Index fell 343.47 points, or 1.09 per cent, to 31,071.05. Markets in Shanghai, Thailand, and Indonesia also closed lower on Thursday.

The Singapore dollar gained against the greenback, trading at S$1.3145 per one US dollar as at 5.35pm. A day ago, S$1.3187 was equivalent to a one US dollar.

The US central bank raised interest rates on Wednesday at the Federal Open Market Committee (FOMC) meeting by 0.25 per cent to a target range of 1.5 per cent to 1.75 per cent. It has also forecast at least two more hikes for 2018, signalling stronger confidence that tax cuts and government spending will lift the economy.

It sees the federal funds rate at 2.1 per cent by the end of 2018, unchanged from its December target. But it upped its 2019 projection to a benchmark rate of 2.9 per cent. That's higher than the 2.7 per cent forecast made in December.

Analysts noted rising concerns over trade wars, with Fed chairman Jay Powell commenting that tariffs, once a "low-profile risk", has become a "more prominent risk to the outlook", a Morgan Stanley report said.

US President Donald Trump is expected to announce more tariffs on Chinese imports this week. This is due to hit China's high-technology sector and could include restrictions on Chinese investments in the US, media reports said.

Mr Trump also said this month he would slap hefty tariffs on imported steel and aluminium, with his administration saying it wants to reduce the trade deficit with China by US$100 billion.

The Wall Street Journal, citing unidentified sources, said Chinese officials are planning their own tariffs based on US exports of soybeans, sorghum and live hogs. The US is among the top suppliers of these products to China.

In a report, State Street's head of policy and research Elliot Hentov said this round of trade tensions could have "significant and lasting implications" for companies in China, certain sectors in the US and global investor portfolios.

It said the latest move by the US to investigate unfair trade practices under Section 301 of the US Trade Act marks a "new phase of the trade dispute between the two nations". The 301 clause is not only country-specific typically, but also provides the US Trade Representative with a wide latitude of penal actions.

"This time, it's different," State Street warned.

Analysts are also watching the build-up of inflationary pressures in the US, with expectations rising for three more rate hikes, rather than two, by the end of the year.

The key indicator for analysts is the Fed's "dot plot", a graph of the target range of rate hikes from FOMC members for a period. The latest showed in effect that just one more member changing his or her mind would push up the median forecast, bringing the total number of rate hikes to four this year.

Charles St-Arnaud, senior investment strategist at Lombard Odier Investment Manager, said in a report: "The main surprise for many investors was that the FOMC continued to expect three hikes this year rather moving to four hikes.

"Many investors would have expected that the Fed would have upgraded its view given the stronger growth, the lower expected unemployment rate and improved economic outlook.

"This could be because some of the FOMC members may have wanted to delay somewhat their decision to upgrade their view on rates to avoid being seen as pre-committing to four hikes so early in the year and painting themselves into a corner."

The Fed said inflation on a 12-month basis is expected to move up in coming months and to stabilise around the FOMC's 2 per cent objective over the medium term.

In his debut showing as FOMC chairman, Mr Powell indicated that the Fed would tighten gradually, striking a balance between the risk of an overheating economy, and the risk that inflation expectations fall under the Fed's longer term target.

"There is no sense in the data that we are on the cusp of an acceleration in inflation," he added during the press conference.

But in a report, Richard Jerram, Bank of Singapore chief economist, wondered if the Fed's forecasts were making much sense.

"Much stronger growth is (quite reasonably) driving a bigger than previously expected drop in unemployment, taking it almost a full percentage point below neutral levels. However, this is set to have almost no impact on inflation," he wrote.

"Underlying inflation is already running at 2 per cent and the lack of response to a strong economy is implausible."

READ MORE: Powell puts market on notice over heightened risks

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