Asian markets rally on hints of Fed pause to tighten policy

March 03, 2023 (MLN): Asian markets followed a Wall Street rally on Friday after a top Federal Reserve official hinted at a possible summer pause to see how tighter policy has impacted inflation.

Despite optimism about China's recovery, a strong run of data sent chills through trading floors in February, wiping out almost all of January's rally, as investors realized the US central bank had more work to do to control prices.

Several Fed policymakers have lined up this year to insist that while inflation is coming down, they remain determined to keep hiking rates until they hit their two percent target. The latest indicators have led investors to bet on rates hitting a peak of 5.5%, though 6% has also been mooted, putting further downward pressure on equities, as reported by APP.

However, Atlanta Fed chief Raphael Bostic's comments gave traders some much-needed hope, as he favored a 25-point move and questioned whether rates should go much higher than 5.25% from the current 4.5-4.75%, allowing the bank to pause its tightening in the summer. "I let the data guide me," he said. "If the data continue to come in suggesting the economy is stronger than I had projected, I'll adjust my policy trajectory."

Meanwhile, eurozone inflation remained sticky in February, leading European Central Bank chief Christine Lagarde to say more tightening was needed. Wall Street ended in the green, with the Dow up more than one percent. Tokyo piled on more than one percent, while Hong Kong, Shanghai, Sydney, Seoul, Singapore, Taipei, Manila, and Jakarta also enjoyed their time in the sun.

SPI Asset Management's Stephen Innes said that while markets remained uncertain, "unlike last year, where policy shocks drove market shifts through most of the year, this year's price action has been driven as much by improving global growth as by tighter global policy."

However, he warned, "As long as activity data remain too strong, fanning the inflation fires, the real vulnerability for risk assets is a definitive hawkish policy shift, particularly from Chair (Jerome) Powell, who represents the core members."

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