Asian shares fall after Fed rate hike, tracking Wall St lead

Judith Bessette
Junho 16, 2017

Stocks fell in Europe and Asia on Thursday as investors concern over the pace of United States economic growth overshadowed a widely telegraphed rise in Federal Reserve interest rates that lifted the dollar off recent lows. The size and scope doesn't feel like it should shock too greatly, but with inflation trends the way they are, it doesn't seem thematic of a central bank needing to aggressively hike rates, concurrently with the balance sheet being reduced, which in itself would act as a tightening of monetary policy through reduced liquidity.

"Washington, Jun 15 The Federal-reserve/6562" target=_blank US Federal Reserve has raised its benchmark interest rate by a quarter point to 1.0- 1.25 per cent and signaled another increase remains likely this year, despite the recent spate of weak economic data.

In its statement following a two-day meeting, the Fed's policy-setting committee indicated the economy had been expanding moderately, the labour market continued to strengthen and a recent softening in inflation was seen as transitory. It also gave a first clear outline of plans to shed its $4.5 trillion bond portfolio built up in three rounds of quantitative easing stimulus. Fed Chair Janet Yellen said this process could begin "relatively soon".

"The committee now expects to begin implementing a balance sheet normalization programme this year, provided that the economy evolves broadly as anticipated", the Fed said in its statement.

"The meeting was definitely tilted towards the hawkish side". Energy and raw-material shares had the biggest declines on the MSCI Asia Pacific Index as oil traded below USD45 a barrel. The year-on-year rate of consumer price inflation, stripping out volatile fuel and food prices, fell to 1.7 percent in May, its lowest level since 2015.

Brent crude futures LCOc1 slipped another 0.4 percent in early Asian trade to $46.83 per barrel, near a five-month low of $46.64 touched in early May.

The broader Topix dropped 0.5 per cent to 1,583.42.

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Retail sales fell 0.3 percent last month - the largest fall since January 2016 and way below economists' expectations for a 0.1 percent gain - amid declining purchases of motor vehicles and discretionary spending.

The dollar index .DXY =USD had fallen to as low as 96.323 on Wednesday, having shed almost six percent on the year, before bouncing back a tad on the Fed's policy tightening. The Fed began buying the bonds after the recession to try to depress long-term loan rates. "That is the main reason why the dollar is remaining supported for now", Credit Agricole currency strategist Manuel Oliveri said.

The dollar rose to 110.09 from 109.57 yen. Sterling weakened 0.3 per cent to $1.2717 before a Bank of England policy decision expected to leave interest rates at record lows. The euro edged up to $1.1218 from $1.1217. As a result, the yield on the benchmark ten-year note, which moves opposite of its price, is up by 2.2 basis points at 2.160%.

Oil prices, which are having a negative impact on inflation worldwide, held steady with global inventories high and doubts over whether the OPEC producers group would be able to implement agreed output cuts. Brent crude, used to price worldwide oils, fell 6 cents to $46.94 a barrel.

Greg McBride, an analyst with consumer financial site, tells NPR's Yuki Noguchi that, taken together, the Fed's moves have caused home equity and vehicle loan rates to increase about 1 percentage point over the last two years.

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