Why a plain-speaking Fed makes stocks jittery

The Fed Chairman, Jerome Powell’s latest policy statement and the press conference that followed, has sent a ripple of nervousness among the stock markets in Asia. This coupled with the ongoing worries about the imposition of trade tariffs by the US on China, has caused a sell-off in most Asian markets.

While the Federal Reserve’s action of raising the Fed Fund rate by 25 basis points was along expected lines, the tone of the policy statement sent the message that the US economy was on a ‘solid recovery path’. Instead of beating around the bush, he made it clear that the ‘moderate recovery path’ indicated so far was now behind.

The decision of the Fed Chair to face the media and explain the Fed’s policy moves after every FOMC meeting, held eight times every year, also seemed to send the signal that rate hikes could get speeded up.

According to the Fed, economic growth in the US picked up in the current quarter due to a bounce-back in household spending and business investment continues to grow strongly. “The fiscal policy is boosting the economy, ongoing job gains are raising incomes and confidence, foreign economies continue to expand, and overall financial conditions remain accommodative.” The median projection for the growth of real GDP has been revised higher to 2.8 per cent for 2018. The Fed has also projected two more rate hikes this year.

Stocks nervous

Stock markets across Asia have turned nervous with benchmark indices of countries including China, Thailand, Singapore, South Korea and the Philippines turning downward. The Sensex and the Nifty have also turned lower after the Fed move. The Jakarta Composite was the worst hit, down 1.85 per cent.

A stronger US translates into more foreign fund flow moving in to US denominated assets, when compared to riskier assets such as emerging market equities. Already there have been outflows from Indian equity and bond market this calendar. Also, the resultant spike in bond yields also make equity assets more unattractive.

Weak industrial production and retail sales data from China also roiled sentiments towards Asian stocks.

Currency and bond market stable

The reaction of the rupee to the Fed move was however quite mild. It weakened slightly by less than 0.1 per cent in the morning and is trading quite flat currently.

There was volatility in dollar index as the Fed chairman made his speech, with the index spiking higher to 94, from 93.5. But all the gains were given up towards the close of trade. The dollar index had been strengthening since the April low of 89.4. But it has been losing momentum since late-May. The latest boost from the Fed proved to be short-lived for the green-back.

US 10-year treasury yield spiked beyond 3 per cent as the Fed turned hawkish. But the trade tensions pulled yields lower to 2.95 per cent. After easing slightly from the high of 3 per cent hit in May, the yield had once again strengthened from 2.78 to 2.95 per cent this month. Indian 10-year bond yield strengthened slightly to 7.91 per cent.

Currency and bond markets are now looking towards the negotiations in the trade tariff war to decide their next move.

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