Shares tick higher as Fed hikes rates, dollar jumps with short-term yields

SYDNEY: Shares edged up in Asia on Thursday as investors bet the Federal Reserve is finally getting the jump on inflation, delivering its first rate hike in more than three years and calming a global bond selloff that had sent long-term yields soaring.

The US dollar hit a seven-week high against its major peers, underpinned by a jump in short-term Treasury yields as markets ramped up wagers that the Fed may have to lift rates again, with a move by December fully priced in. That proved a headwind for commodities, with oil prices giving back ground.

The focus now shifts to the Bank of England, which is widely expected to leave interest rates steady later in the day, but all eyes will be on any hint about if high energy prices could force it to hike in November. The Bank of Japan, by contrast, is all but certain to lift interest rates on Friday.

MSCI's broadest index of Asia-Pacific shares outside Japan rose 0.4 per cent while Japan's Nikkei gained 0.5 per cent. Chinese blue-chips slipped 0.4 per cent and Hong Kong's Hang Seng fell 0.9 per cent.

Nasdaq futures gained 0.6 per cent and S&P 500 futures bounced 0.5 per cent, after small declines on Wall Street.

As widely expected, the Fed raised interest rates by a quarter point overnight, but the unanimous decision tilted to the hawkish side, with the board signalling one more rate hike this year. Goldman Sachs now expects the Fed to hike rates again in October.

"We think October is the most likely time for the next move because it is most natural to deliver hikes that the FOMC presented today as supporting 'a timelier return' to the 2 per cent target at consecutive meetings," said Goldman analysts in a note.

"Additional hikes are possible but not our base case."

Futures imply there is a 50 per cent chance that the Fed could follow up with a second hike as soon as next month to rein in inflation. A total of three rate rises have been priced in for this tightening cycle.

The Treasury yield curve bear flattened, with short-term maturities taking a hit but long bonds heaving a sigh of relief. Two-year Treasury yields held at 4.7145 per cent, after spiking 6 basis points overnight to the highest since July 2024.

That helped boost the US dollar to a seven-week high against its major peers such as the yen and euro. It was last at 100.33, after surging 0.7 per cent overnight.

The yield on benchmark US 10-year notes paused for breath at 4.9917 per cent, hovering under the key level of 5 per cent, while 30-year bond yields eased 2 bps to 5.3328 per cent, pulling further away from a 19-year high of 5.401 per cent.

"Chair Warsh will be pleased that the breakout of the 10-year yield shows a moderate fall in inflation expectations, which telegraphs a nod of approval from the market to the hike as an inflation containment one," said Padhraic Garvey, regional head of research, Americas, at ING.

"It was still an eloquent performance. But it won't rescue the back end of the curve. We identify 5.25 per cent as a next target for the US 10-year yield."

Commodity markets took a hit. Brent crude futures slipped 0.7 per cent to US$105.05 a barrel after falling 2.7 per cent overnight as Saudi Arabia was reportedly offering crude cargoes through Oman, easing some concerns about Middle East supply disruption.

Gold, however, showed some resilience, rising 1 per cent to US$4,305 an ounce, offsetting a 0.7 per cent fall overnight.