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Published: June 30, 2023
Updated: June 30, 2023

Asian Stocks Retreat as Rate Hike Concerns Mount, Yen Vulnerable

Asian stocks experienced a slight decline on Friday following robust economic data from the United States, which reinforced expectations of a prolonged period of higher interest rates by the Federal Reserve. Concurrently, the Japanese yen crossed a psychologically significant level, prompting concerns of potential intervention. This article provides an overview of the market situation in Asia, highlighting key stock market performances, concerns over China's post-COVID-19 recovery, and the impact of strong U.S. economic data.

Asia-Pacific Stock Markets:

The MSCI Asia-Pacific shares ex-Japan index dipped 0.21%, but remains on track to register a gain of over 1% in the first half of the year. Australia's S&P/ASX 200 index slipped 0.39%, while Japan's Nikkei recorded a nearly 1% decline. Despite this, the Nikkei remains the best-performing Asian stock market, posting a 26% gain in the first half of the year.

Concerns over China's Recovery:

Investors have expressed caution regarding China's post-COVID-19 recovery, waiting for signs of robust stimulus measures. A recent official factory survey revealed that China's manufacturing activity contracted for the third consecutive month in June, albeit at a slower pace. The uncertainty surrounding China's recovery has contributed to volatility in the country's stock markets.

Market Performance:

China's blue-chip CSI300 Index fell 0.14%, and the Shanghai Composite Index experienced a slight dip of 0.11%. Hong Kong's Hang Seng Index slipped 0.28% and is expected to close the first half of the year with a 5% decline.

Strong U.S. Economic Data and Rate Hike Expectations:

Data throughout the week has depicted a resilient U.S. economy, alleviating concerns of an impending recession. The unexpected decrease in new claims for unemployment benefits and the upward revision of first-quarter GDP growth have bolstered expectations that the Federal Reserve will continue its hawkish approach. The market currently prices in an 88% chance of a 25 basis points rate hike by the Fed in the upcoming month.

Impact on Treasury Yields:

The release of strong economic data prompted an increase in Treasury yields. The 10-year Treasury note yield reached a three-month high of 3.868% on Thursday. During Asian trading hours, it stood at 3.840%. Similarly, the two-year U.S. Treasury yield, which is closely tied to interest rate expectations, reached over a three-month high of 4.892%.

Focus on Inflation and Central Bank Policies:

Investors will closely monitor the U.S. Personal Consumption Expenditures (PCE) index reading, a key inflation gauge favoured by the Federal Reserve. Additionally, inflation data for May in the Eurozone will offer insights into potential future actions by the European Central Bank. Diverging inflation trends across the region may result in different policy approaches.

Japanese Yen and Potential Intervention:

The Japanese yen has weakened, crossing the 145 per dollar level for the first time since November. Market participants are concerned about possible intervention by Japanese authorities due to expectations of ultra-low interest rates maintained by the Bank of Japan. Japanese Finance Minister Shunichi Suzuki emphasised that all options would be considered in responding to excessive currency market movements.

Asian stocks experienced a slight decline as strong U.S. economic data raised concerns of an extended period of higher interest rates by the Federal Reserve. Japan's yen weakening past a key level heightened worries of potential intervention. Uncertainty persists regarding China's post-COVID-19 recovery, while investors eagerly await signs of robust stimulus measures. The market will continue to monitor inflation data and central bank policies for further guidance.