SINGAPORE – Asia's stock markets were steady but fragile on Thursday, a day after their biggest drawdown in three months as investors weighed the risk of the Federal Reserve announcing a 100 basis point interest rate hike next week to tackle sticky inflation.
The Japanese yen loitered just above recent lows, riding a boost from the strongest hints yet of possible market intervention by Japanese authorities. The New Zealand dollar jumped a bit on better-than-expected growth data.
MSCI's broadest index of Asia-Pacific shares outside Japan rose 0.4 percent and Japan's Nikkei rose 0.3 percent.
"Equity markets are presently in no-man's land," said Sean Darby, global equity strategist at Jefferies in Hong Kong.
"Better macro news to support earnings is discounted as the need for further tightening to quash growth – while CPI prints are not declining fast enough," he said.
"The best metaphor is that the Fed is not only driving the economy using a rear view mirror but is now being forced to press the 'rate rise' accelerator just as bond markets are discounting an overtightening."
Fed funds futures, which were dumped along with stocks after Tuesday's stubbornly hot US inflation reading, imply a 37 percent chance of a 100 basis point rate hike next week and have the benchmark US interest rate about 4.3 percent by February.
Treasuries were calm in Tokyo trade on Thursday, but the US yield curve is deeply inverted – often a signal of a looming recession – as investors believe that rate hikes through this year and next will take a bite out of future growth.
Two-year yields, which track near-term rate expectations, were steady at 3.7860 percent, up 22 basis points this week for a seventh straight weekly gain. The benchmark 10-year yield was at 3.4062 percent.
"(There are) two opposing forces for the 10-year note – the upward pressure from Fed hikes and downward pressure from a potential economic downturn in the future," said NatWest Markets' US rates strategist Jan Nevruzi.
"We are more firmly in the camp that more hikes today increase the odds for a deeper recession."
Line in the sand
In currency markets, the US inflation shock and expectation of rate hikes in response has sent the greenback up to re-test recent multi-decade highs. Thursday moves were modest with the euro steady at US$0.9978 and the Aussie taking a small lift to US$0.6754 after some mixed employment data.
The yen, pounded some 20 percent lower against the dollar this year, bounced off its lows a day ago when the Bank of Japan checked dollar/yen rates with banks around the 145 yen per dollar level – a possible prelude to yen buying. It was last at 143.05 per dollar.
"I certainly don't want to be the one to stand here and suggest that this is the line in the sand," Shafali Sachdev, head of FX, fixed income and commodities for Asia at BNP Paribas Wealth Management in Singapore.
"But what's clear is that the market is wary of the level, and has tried to test the level a few times which seems to suggest that if it breaks, it may overshoot quite rapidly."
Thursday data showed Japan posted a record trade deficit in August – aggravated by the yen's slide, but also yet another weight on the currency.
Brent crude futures held at US$94.04 a barrel. Spot gold, which has slipped as the dollar and US yields have gone up, sat at US$1,696 an ounce.