Shenzhen stocks fall 2% in mixed Asian markets; China maintains medium-term interest rates unchanged.
Asian stock markets fell on Friday, with most regional indices heading for weekly losses due to rising expectations of aggressive Fed measures and worries of a worldwide recession.
Despite data showing surprise growth in China's industrial production and retail sales, Chinese stocks were forecast to fall more than 3% this week, reflecting mounting fears about the country's economic growth. This year, China's economy has suffered as a result of Beijing's rigorous zero-COVID policy.
Wall Street had a shaky start for Asian stocks. The Shanghai Shenzhen CSI 300 and Shanghai Composite indexes in China were among the day's worst performers. Mainland China's Shenzhen Component lost 2.105% to 11,526.96, pressured down by energy firms. The Shanghai Composite fell 1.16% to 3,199.92, while the Hong Kong Hang Seng index rose 0.44% to 18930.38.
The Nikkei 225 in Japan gained 0.21% to 27,875.91, while the Topix index gained 0.15% to 1,950.43. The Japanese yen was last trading at 143.69 per dollar, following a reported "rate check" by the Bank of Japan.
South Korea's Kospi closed 0.4% lower at 2,401.83, while Australia's S&P/ASX 200 rose 0.21% to 6,842.90.
The minor lowering of inflation readings this week had drove global equities higher and restrained a rising dollar, until a spate of Fed speakers put an end to thoughts of the central bank going slow on additional policy tightening. On Thursday, China's blue-chip stock index scored its highest gain in more than three months.
"The Fed is going to do what they said, which is whatever it takes to address inflation, so you are seeing some repositioning around that out of US equities," said Carlos Cas.
Adding to the gloom, both the World Bank and the International Monetary Fund warned of a possible recession in the coming months. High inflation and high interest rates are projected to have a negative impact on economic growth this year and next.
The Nifty 50 index in India sank 1.1%, while the Taiwan Weighted Index fell 0.9%. Indonesian stocks fell 1.7%, trailing their Southeast Asian neighbours.
South Korea's KOSPI index declined 1% as statistics revealed that the country's trade deficit reduced to a new record low in August, while Australia's S&P/ASX 200 climbed 0.21% to 6,842.90. High commodity prices and a weakening won have increased the cost of South Korean imports this year, putting a strain on the economy.
The FOMC meeting on September 21 will be significant, not because of the size of the rate hike, but because of the FOMC projections. Since the July meeting and the hotter-than-expected CPI result, the bond and futures markets have repriced substantially. It makes the Fed estimates critical, as they will outline a likely policy path for the rest of 2022 and 2023. If the Fed issues estimates that are too low, financial conditions may ease, which is not what they want.
The market may have made the Fed's task easier because Fed Funds futures currently forecast the overnight rate rising to 4.45% by April. The problem lies in what happens next, because the market is already pricing in rates falling back to 4.0% by December 2023. Given the hotter-than-expected CPI figure and demands to keep rates stable for some time, that may be too low for the Fed.
All of this indicates to the Fed becoming much more hawkish than it was at the June FOMC meeting. To avoid financial conditions from easing, the Fed will have to steer monetary policy in a more hawkish direction than the Fed Funds Futures market is now pricing, which might result in them projecting a 4.5% rate by the end of 2023.
However, China's central bank held its one-year medium-term lending facility (MLF) rate constant at 2.75. According to a Reuters Recent survey, China's does so for monetary easing measures and maintain the medium-term policy rate unchanged this month, as deepening policy divergence with the Federal Reserve might put further pressure on the Chinese currency and risk capital outflows.
The MLF operation was designed to "keeping banking system liquidity reasonably ample," according to a statement posted online by the central bank.
Last month, the PBOC reduced the interest rate on MLF loans to financial institutions by 10 basis points in order to reduce financing costs for the real sector.
Due to hefty MLF maturity, which totalled 2.6 trillion yuan in the run-up to the year's conclusion, several traders and analysts anticipate some liquidity injection later this year.
"We expect more reserve requirement ratio cuts in the coming months, although we see no urgency for more imminent interest rate cuts," said Tommy Xie, head of Greater China research at OCBC Bank.