(Bloomberg) – Global traders already on tenterhooks over this week’s key Federal Reserve meeting were jolted further Tuesday by Australian inflation data that smashed expectations, a surprise monetary tightening in Singapore and further swings in U.S. equity futures.
A maelstrom of volatility in the past 24 hours saw almost $3 trillion wiped off global stocks before a reversal with U.S. benchmarks closing in the green.
The moves come as traders brace for the impact of Wednesday’s Fed meeting on expectations that they could announce the start of a hiking cycle to damp down inflation, with anticipation already leading to a furious selloff of Treasuries and tech stocks.
On Tuesday, Australia’s three-year bond yield jumped to the highest since April 2019 on rising core consumer prices, while the Singapore dollar strengthened after the central bank reacted to inflation at an 8-year high.
On equity markets, investor jitters lingered. U.S. equity futures resumed declines following the sharp swings Monday, an Asia-Pacific share gauge tumbled as Japan’s Topix entered a correction, and China’s CSI 300 was close to a bear market. Europe fared better, with equities rebounding after the rout.
The focus on the Fed is reviving fears that central banks are barrelling toward a policy mistake, something that’s seen as a key risk for 2022. Worries about too-aggressive tightening could be heightened if economic data deteriorate. Surveys of purchasing managers on Monday showed business activity weakened at the start of the year, largely due to the impact of omicron, and the inflation squeeze is expected to weigh on consumer confidence.
“There is the risk that a rates shock triggers a growth shock,” Goldman Sachs Group Inc. strategists led by Christian Mueller-Glissmann wrote in a note after Monday’s markets rout. “That risk looks higher, as inflation pressures are much higher than since the 1980s.”
The Monetary Authority of Singapore’s first unscheduled action since 2015 came ahead of its scheduled April meeting and was due to upside risks to inflation forecasts. The central bank, which uses foreign exchange as its main policy tool, will allow its currency appreciate against peers in the months ahead to counter imported cost pressures.
Meanwhile, hotter inflation in Australia bolstered expectations its central bank will scrap its bond-purchase program at next Tuesday’s meeting and potentially opens the door to rate rises this year, something Governor Philip Lowe had previously all-but ruled out.
All eyes are now on the Fed, which is expected to pave the way for its first interest-rate hike since 2018 in March, as the U.S. central bank tries to extinguish soaring inflation.
“Markets are second guessing the timing and magnitude of rate rises by the Fed — investors were already hypersensitive in the past week and the latest events are certainly not helping,” said George Boubouras, head of research at K2 Asset Management in Melbourne. “It’s still a very risky period for markets.”
Traders have priced in more than four U.S. rate hikes already and are looking for signals on how officials intend to cut the size of the balance sheet — another potential catalyst for financial market volatility.
“The clear message coming out of Asia today is markets need to be ready for active global central banks in the coming two weeks,” said Su-Lin Ong, senior economist and rates strategist at Royal Bank of Canada in Sydney.
Some, including Bank of New York Mellon’s Wee Khoon Chong, are more optimistic that market swings could be contained, at least in Asia.
“The recent volatility I think is quite a typical market reaction to how the monetary policy cycle has turned,” said Chong, senior market strategist in Hong Kong. “Asia inflation is still low in absolute terms but is rising gradually.”
(Updates markets, outlook for growth starting in third paragraph) – With assistance from Garfield Reynolds and Nikos Chrysoloras.
© 2022 Bloomberg L.P.
