Stock trading this week has opened with some less than encouraging signs. While, as of the time of writing, the opening bell on Wall Street has not yet been rung, Asian Indices are showing signs of struggle on the other side of the Pacific. Some analysts have been pointing to continued hawkish monetary policy on the part of the Fed as the cause of these drops.
Japan, Hong Kong Shares Droop
Share investors on the trading floors of East Asia seem to be in a less-than-bullish mood this morning. As of now, Tokyo’s Nikkei Index (Japan 225) closed down by over 2.6%, while the Hong Kong-based Hang Seng Index (Hong Kong 50) is showing an over 0.8% drop in overall value.
While economic trouble emanating from the continent’s most populous nation as it struggled to contain COVID-19 infections has captured the headlines of various financial journalistic outlets throughout this year, this time, the core issue could be coming from the United States.
Asia’s economies, as a rule, are heavily reliant on exports to other countries, among them the United States. As such, if monetary tightening were to lead to an economic slowdown, or even a recession, it stands to reason that American consumers would reduce their demand for non-essential goods like those imported from Japan or China.
The proximate cause for these economic jitters may have come from a speech delivered by Federal Reserve Chairman Jerome Powell in Wyoming on Friday, August 26th. While unemployment in the United States is at a fifty-year low, thus far, America’s top monetary policymakers have been unable to rein in inflation and bring it to the ‘ideal’ annualised rate of two to three percent. Accordingly, the Federal Open Market Committee, according to Powell, may be forced to continue on its path of steep interest rate hikes, which could result in slower growth and broad-based layoffs over the near term.
Wall Street Dips Going Into Weekend
Key Asian Indices may be responding now to Powell’s clear statement of priorities, but they are following the track worn by Wall Street as last week came to a close. Last Friday, perhaps reacting to the growing feeling that high interest rates are here to stay for some time, New York City traders hit a sell-off.
By the close of trading last week, the S&P 500 (USA 500) was down almost 3.4%, the Dow Jones Industrial Average (USA 30) by 3%, and the tech-heavy Nasdaq (US-TECH 100) by just under 4%. It may seem that traders and investors alike may be growing more risk-averse as the coast is not yet clear.
Jerome Powell and his peers are between a rock and a hard place; while such high inflation rates are squeezing consumers’ pocketbooks, an interest rate-spurred economic slowdown in the United States may not be received well by the average citizen. However, it seems clear that the Fed’s top priority at the moment is preventing entrenched inflation rates, which could change price behaviour on both the producer and consumer ends and keep prices higher for longer. Whether American monetary policy can strike the right balance between slowing inflation and putting the brakes on the overall marketplace, and how stocks across the globe will react to these efforts, remains to be seen.