Asian markets mostly fell Friday after another hefty drop in New York and Europe as central bank interest rates hikes to counter soaring inflation fan fears of a recession.
All eyes are now on a Bank of Japan decision later in the day, with speculation that officials could finally begin to shift from their ultra-loose policies that have left it trailing most of its peers and sent the yen tumbling more than 13 percent this year.
Gone is the optimism that flowed through trading floors immediately after the Federal Reserve on Wednesday announced its biggest rate increase for 28 years as global finance chiefs followed suit, putting a squeeze on dealers’ ability to borrow.
Markets have been tumbling for months as traders contemplate the end of the era of cheap cash that sent valuations to record or multi-year highs, with inflation at levels not seen in decades owing to a surge in energy and food prices.
The Bank of England on Thursday lifted rates for a fifth straight time to their highest since 2009 during the financial crisis, just as the Swiss central bank shocked markets by unveiling its own half-point increase — its first rise in 15 years.
The European Central Bank has also signalled it will announce a hike soon.
Equities plunged as expectations for recession continue to rise. The Dow ended below 30,000 for the first time in more than a year and the S&P 500 is now at its lowest since December 2020.
With rates rising everywhere else, pressure is building on the Bank of Japan to move away from its policy of keeping its foot on yields.
While officials in Tokyo insist that low rates are still needed to nurture a struggling economy, there is “a building expectation that the Bank of Japan will need to amend their policy stance closer to some version of normal”, said Benjamin Jeffery and Ian Lyngen, strategists at BMO Capital Markets.
Observers said traders were struggling to work out what officials will do, though there is a feeling they will make some concessions with inflation at an eight-year high as energy prices spike in the commodity-poor country.
And while the yen dipped slightly against the dollar Friday it was off the 24-year lows touched earlier in the week.
Stephen Innes at SPI Asset Management said: “No central bankers worth their weight would put inflation-fighting credentials on the line and import higher energy inflation via a weaker currency.”
He added that “in what is a highly ominous signal for stock market investors, given the broader index’s sensitivity to rising bond yields… the global race to hike rates is nowhere near the finishing line”.
In early trade, Tokyo, Sydney, Seoul, Singapore, Wellington, Taipei, Manila and Jakarta were all in the red, though Hong Kong and Shanghai were slightly higher after steep losses on Thursday.
– Key figures at around 0230 GMT –
Tokyo – Nikkei 225: DOWN 2.2 percent at 25,858.50 (break)
Hong Kong – Hang Seng Index: UP 1.0 percent at 21,063.11
Shanghai – Composite: UP 0.5 percent at 3,300.72
Dollar/yen: UP at 133.37 yen from 132.14 yen late Thursday
Euro/dollar: DOWN at $1.0532 from $1.0550
Pound/dollar: DOWN at $1.2320 from $1.2350
Euro/pound: UP at 85.48 pence from 85.40 pence
West Texas Intermediate: DOWN 0.5 percent at $116.96
Brent North Sea crude: DOWN 0.5 percent at $119.24 per barrel
New York – Dow: DOWN 2.4 percent at 29,927.07 (close)
London – FTSE 100: DOWN 3.1 percent at 7,044.98 (close)
— Bloomberg News contributed to this story —
US baby formula plant again halts production due to flooding
Abbott Nutrition has once again shut down a baby formula plant, this time due to heavy rains and flooding, less than two weeks after it reopened to try and mitigate a crippling US shortage.
The facility in Sturgis, Michigan resumed production on June 4, only to close down again earlier this week so the company could assess rain damage.
Severe thunderstorms that battered southwestern Michigan on Monday resulted in “high winds, hail, power outages and flood damage,” as well as “flooding in parts of the city, including areas of our plant,” Abbott said in a statement posted to their website Wednesday night.
“As a result, Abbott has stopped production of its EleCare specialty formula that was underway to assess damage caused by the storm and clean and re-sanitize the plant,” the statement said.
“This will likely delay production and distribution of new product for a few weeks.”
The plant, a major producer of formula, shut down in February and issued a product recall after the death of two babies raised concerns over contamination.
That worsened to a widespread forumla shortage caused by supply issues, which was particularly concerning to parents of infants with allergies or with certain metabolic conditions, who desperately scoured stores and online sources for the specialized formulas.
The crisis prompted President Joe Biden last month to bring in formula from Europe on commercial planes contracted by the US military. He also invoked the Defense Production Act to give baby formula manufacturers first priority in supplies.
Abbott, which controls about 40 percent of the US baby food market, had announced its hypoallergenic EleCare formula and should be back on store shelves around June 20.
In the statement Wednesday, the manufacturer assured consumers that it had “ample existing supply” of EleCare and most of its other specialty formulas to meet demand until production could resume again.
The formula shortage, coming at a time when soaring inflation and supply-chain delays have fanned a growing sense of unease among many American families, and Biden critics have seized on the situation to question the competence of his administration.
US urges Russia to open Ukrainian ports for grain exports
US Agriculture Secretary Tom Vilsack called on Russia Thursday to rapidly open Ukraine’s ports to permit the export of millions of tonnes of stockpiled grain.
“They should be acting immediately to open up those ports and they should end this war,” Vilsack told reporters at the United Nations.
“This is serious thing, we shouldn’t be using food as a weapon,” he said.
The United Nations has been deep in talks between Moscow, Kyiv and Ankara for weeks on how to open up the Black Sea, where the Russian navy has created a blockade around Ukraine, to commercial cargo ships to carry the grain to global markets.
Such an agreement would also permit Russian fertilizer, now blocked by sanctions, to return to the global market.
With grain prices soaring internationally and key importers in the Middle East and Africa facing supply shortfalls, Moscow has demanded that economic sanctions on it be lifted in exchange for allowing the exports.
Vilsack said US and European sanctions do not apply to grains and fertilizers.
Addressing the ongoing talks on the issue, Vilsack said he hoped that Russia would “take this thing seriously and that they’re not just doing this to create an image.”
He urged Moscow “to make sure that they are negotiating in good faith about the reopening of the ports and they do so quickly. Because the need is immediate.”
Vilsack said a US proposal to build silos in Poland to receive Ukrainian grain was to reduce the possibility of spoilage before the grain can transported to markets.
On Wednesday, Turkish Foreign Minister Mevlut Cavusoglu said Ankara is ready to host a four-way meeting with the United Nations, Russia and Ukraine to organize the export of grain through the Black Sea.
Under the plan, safe corridors for grain exports from Ukraine could be established without de-mining in the Black Sea, he said.
“If Russia answers positively, there will be a four-partite meeting in Istanbul,” Cavusoglu said.
There was no immediate comment from Moscow.
Is recession the only way out of US inflation scourge?
A massive interest rate hike by the US Federal Reserve and promises of more to come are fueling warnings that the only offramp from the searing price hikes engulfing American families is a full-blown recession.
The Fed remains hopeful it can slow activity and demand, cooling the blistering pace of inflation, without derailing the world’s largest economy. But skepticism is growing about the chances of success.
The central bank hiked the benchmark borrowing rate on Wednesday by three-quarters of a point, the biggest increase in nearly 30 years, and indicated a similar move is possible in July.
The super-sized rate increase came as the Fed faces intense pressure to curb soaring gas, food and housing prices that have left millions of Americans struggling to make ends meet and sent President Joe Biden’s approval ratings plunging.
The central bank has raised the key rate 1.5 points since March, as the Russian invasion of Ukraine and ongoing Covid-related supply chain issues combine to send prices up at the fastest pace in more than four decades.
Fed Chair Jerome Powell said recession is not the goal, but bringing down inflation “expeditiously” is “essential” since that is vital to a healthy economy.
But Kathy Bostjancic, chief US economist at Oxford Economics, warned that “it becomes very difficult to thread that needle.”
The Fed will need a Goldilocks scenario where “a number of things fall into place and at the right time,” she told AFP.
The healthy US labor market and strong consumer demand, helped by a beefy stockpile of savings, are working in the Fed’s favor and could support activity even as the economy cools.
In the wake of the Fed decision, mortgage rates rocketed to their highest level in 13 years, with the average for a 30-year, fixed rate home loan reaching 5.78 percent.
Drivers still face gas prices at the pump of more than $5 a gallon, although for the first time in days, the national average fell on Wednesday, down from Tuesday’s record.
“My colleagues and I are acutely aware that high inflation imposes significant hardship, especially on those least able to meet the higher costs of essentials like food, housing and transportation,” Powell told reporters after the rate hike was announced.
– Higher unemployment –
With the shift towards prioritizing the aggressive tightening of lending conditions — which policymakers see rising to 3.8 percent next year — the best the Fed might be able to hope for now is a “softish” landing, which would include higher joblessness.
The economy has continued to create jobs: the unemployment rate in May was 3.6 percent, just a tick above its pre-pandemic level, and there are nearly two job openings for every unemployment person, compared to 1.3 pre-Covid.
The Fed chief said “a 4.1 percent unemployment rate with inflation of well on its way to two percent, I think that would be a successful outcome.”
But he stressed that “events of the last few months have raised the degree of difficulty” in achieving the soft landing, and it likely will “depend on factors that we don’t control.”
But a half-point increase in the jobless rate can signal the start of a recession.
Diane Swonk of Grant Thornton, a long-time Fed watcher, called the central bank’s outlook “fanciful.”
– Rising risks –
Steve Englander of Standard Chartered Bank and a former Fed economist does not expect a recession — usually defined as two quarters of negative growth — and said unemployment may not have to increase by that much to achieve the Fed’s goals.
But the central bank will have to shrink demand, and “it’ll be painful, even if it’s not a technical recession.”
“The risk of a recession is rising and it’s rising sharply,” he told AFP.
But it is a risk the Fed is willing to take since it has made fighting inflation the priority.
Bostjancic said a softish landing is still possible, but without tough action to contain prices, the US could face stagflation — lower or negative growth with high inflation — last seen in the 1970s and 80s.
“The Fed is worried that if they don’t take care of inflation, now, it’s going to linger and be a problem many years into the future,” she said.
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