Shares rally as markets bet on more gradual rate hikes

MSCI‘s broadest index of Asia-Pacific shares outside Japan rose 0.41%. Japan’s Nikkei share average opened up 0.36%, while the Seoul index and Australias index opened up 0.75% and 0.76% respectively.

Economists are debating whether the worlds biggest economy is already in or on the verge of a recession, as it battles its highest inflation in four decades and gross domestic product shrinks – at a 0.9% annualized rate last quarter, after a 1.6% contraction in the quarter before that.

The Federal Reserve delivered another aggressive interest rate hike of 75 basis points this week, its third this year.

Meanwhile, China, still in the throes of COVID-19 outbreaks and lockdowns, did not mention its full-year GDP growth target after a high-level Communist Party meeting and said instead it will try hard to achieve the best possible results for the economy this year.

U.S. equities, however, rallied this week as comments by Federal Reserve Chair Jerome Powell led to speculation that rate hikes would begin to slow and eventually turn to rate cuts in 2023. Shares of Amazon and Apple shot up 12% and 3% each after hours after the tech giants reported earnings that beat expectations.

The Dow Jones Industrial Average rose 332.04 points, or 1.03%, to 32,529.63, the S&P 500 gained 48.82 points, or 1.21%, to 4,072.43 and the Nasdaq Composite added 130.17 points, or 1.08%, to 12,162.59.

But analysts warned the rally could be short-lived.

“Financial markets have taken the combination of the … (Fed) announcement and … the negative U.S. GDP print as confirmation that policymakers will ease off their aggressive monetary tightening cycle before too long. Our sense, however, is that such hopes are premature and that some of this years dominant trends, notably the rise of the U.S. dollar, will reassert themselves before too long,” Capital Economics said in a note.

The dollar stayed near a six-week low against the yen for similar reasons, trading at 134.39 yen, bouncing 0.13% after an overnight plunge of 1.74%, the most since March 2020. It touched a low of 134.2 on Thursday, the weakest since June 17.

U.S. Treasuries slipped on the weak economic data, with the yield on benchmark 10-year Treasury notes retreating to 2.6759%. The two-year notes yield, which typically moves in step with interest-rate expectations, was at 2.8703%.

“Theres this see-saw at the moment with inflation and growth concerns,” said Tom Nash, fixed income portfolio manager at UBS Asset Management in Sydney, with surprisingly soft U.S. growth figures putting the focus on the latter.

“When it‘s inflation concerns, yields are going up, when it’s growth concerns yields are going down. What were seeing at the moment is the market is putting less emphasis on inflation and more on growth.”

Brent crude futures rose 0.8% to $108 a barrel and U.S. West Texas Intermediate crude (WTI) was up 1.08% at $97.46.