Asian markets weigh US economic slowdown, Fed's rate hike outlook

July 04, 2023 (MLN): Asian markets struggled for direction on Tuesday as investors weighed signs of a slowing US economy against hopes that the Federal Reserve's interest rate hiking cycle could be nearing its end, as APP reported.

Data showing a sharp drop in the central bank's preferred gauge of inflation for May fueled a rally across equities in New York last week and Asia on Monday.

The readings followed a series of indicators suggesting the economy remained in rude health, putting pressure on the Fed to keep tightening monetary policy.

Fed chair Jerome Powell has warned that more rate hikes are in the pipeline due to still-elevated inflation and the strong labor market, though analysts question whether the Fed will follow through with that.

However, while traders view "bad news is good news" as it gives the bank room to hold rates, the possibility of a contraction kept the optimism in check.

On Monday, a closely watched survey of US factory activity showed the sector shrank again in June and hit its lowest level since May 2020.

The Institute for Supply Management (ISM) reading also indicates that the ongoing contraction in the sector is picking up pace.

Wall Street limped to a positive close, with business thinned by traders winding down for the July 4 holiday, but Asia was unable to maintain Monday's momentum.

Hong Kong and Shanghai edged up, along with Wellington, Taipei, and Jakarta, though Tokyo, Sydney, Singapore, Seoul, and Manila dipped.

However, Jim Bianco, president and founder of Bianco Research, warned that while inflation was still falling, the Fed should be on alert as it could begin to climb again after reaching as low as 3%, which is still above the bank's 2% target.

He stated, "If the inflation rate bottoms at three and starts drifting higher, the Fed's going to find this unacceptable, and the two rate hikes that we have priced in for the rest of the year will happen if not three."

Oil prices edged up on Tuesday, a day after dropping more than one percent as an initial rally sparked by Saudi Arabia and Russia's announcement of further output cuts faded away.

While the cuts will result in tighter supplies, rising interest rates and the lingering threat of a recession are weighing on demand expectations.

Warren Patterson, at ING Groep NV, mentioned that "Fundamentals are not having as much influence on price direction as one would expect. Instead, the uncertain macro outlook is what the market is focused on."

Investors are keeping an eye on China-US relations after Beijing imposed export controls on two rare metals essential for the manufacture of semiconductors, citing security concerns.

This move comes as the two countries compete over the global market for chips and follows previous US actions to blacklist some Chinese companies, aiming to restrict their access to American technologies, including advanced chips.

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