Interest rates in the U.S. remain high for a long period of time, leaving stocks stagnant

Asian shares fell near two-month highs on Thursday as the dollar suffered modest losses after the U.S. Federal Reserve decided not to raise rates for the first time in 17 months, opening the door to higher hikes in the future.

The Fed left its benchmark interest rate window at 5-5.25%, and Chairman Jerome Powell said the US central bank needed to gather more information about the economy to decide what to do next.

Committee members surprised markets by forecasting two more 25 basis point hikes this year, raising short-term interest rates in the U.S. and betting on which cuts they will make in 2023.

The euro hit a one-month high of $1.0865 following the decision and is awaited at $1.0826 ahead of the European Central Bank’s meeting today, as markets expect an eighth straight rate hike to push borrowing costs to their highest levels in two decades. .

The S&P 500 swung sideways overnight and futures fell 0.1% in Asia. MSCI’s broadest index of Asia-Pacific shares outside Japan rose 0.2%, while Japan’s Nikkei was breathlessly flat.

“Both expected hikes were initially seen as hawkish,” said Steve Englander, head of G10 currency research at Standard Chartered in New York, but traders quickly shrugged it off when Powell struck a more dovish tone at his news conference.

“The market assumes that interest rates will remain high for a longer period of time, rather than skyrocketing in line with the change in expected Fed funds rates.”

The two-year Treasury yield rose to 13.5 bps during the session, after two bps higher at 4.69%. The ten-year yield fell 3 bps to 3.79%.

Fed funds futures didn’t give much, but expectations for a rate hike next month tightened slightly and traders pushed back hopes of further cuts by 2024.

“The conditions we need to lower inflation are coming into place,” Powell said. “But it will take some time for that to really have an impact on inflation.”

China Lovers

In Asia, the focus was on China, where industrial production and retail sales fell short of market expectations, the latest sign that the economic recovery is not meeting expectations.

China, a key benchmark, cut its medium-term interest rate by 10 basis points and the yuan hit a six-month low of 7.1783 per dollar.

“Expectations are rising for further stimulus from Beijing, which could be a much-needed boost for the Chinese market to recover from a disappointing first half,” said Tai Hui, Asia Pacific chief strategist at JP Morgan Asset Management.

Elsewhere, strong Australian jobs data gave some support to the Aussie dollar, which was broadly steady at $0.6786, while the New Zealand dollar was on the ropes after data showed the economy had contracted in recession this year.

This confirms the end of rate hikes and the Kiwi last traded down 0.7% at $0.6163.

The euro, which has been higher against the dollar for two weeks, faces its next test when the ECB meets today on signs of slowing US inflation and hints of a cooling labor market. An increase of 25 bp is expected.

Japanese data showed exports unexpectedly rose in May, but growth rate crawled. The yen fell 0.5% to 140.74 per dollar, although there were moves ahead of a Bank of Japan meeting on Friday.

Oil fell slightly, with Brent crude futures down 0.16% at $73.08 a barrel.

Non-yielding gold, weighed by expectations of higher US interest rates, hit a two-week low of $1,934 an ounce.

Bitcoin fell 3% overnight, closing losses at $25,049.