Asia Stocks Ease after Powell Testimony; Spotlight on BoE

STOCK MARKET - SINGAPORE. Asian shares edged lower on Thursday after Federal Reserve Chair Jerome Powell stuck to his recent hawkish tone on the bank's likely interest rate path, while the focus switches to the Bank of England' policy decision later in the day.

Futures indicated stocks in Europe were set to open deep in red, with Eurostoxx 50 futures down 0.51%, German DAX futures down 0.55% and FTSE futures down 0.63%.

MSCI's broadest index of Asia-Pacific shares outside Japan was 0.24% lower at 521.81, set for a fourth straight day of losses and on course to snap its three-week winning run. The index is down around 2.7% for the week, the worst since early March.

Last week, the Fed held its benchmark interest rate steady at between 5% and 5.25%, but officials projected rates will have to increase another half percentage point by year's end to tame inflation.

Powell in his remarks to lawmakers in Washington said the outlook for two further 25-basis-point (bps) rate increases are "a pretty good guess" of where the central bank is heading if the economy continues in its current direction.

Markets, though, remain unconvinced, pricing in a 72% probability of a 25 bps hike next month, but no further hikes after that, according to the CME FedWatch tool.

Kevin Cummins, chief economist at NatWest Markets, said Powell's testimony didn't shed any new light on the Fed's thinking or the likely future path for monetary policy, adding that his tone was very similar to last week's press conference and mostly leaned hawkish.

"It's clear that the FOMC wants the market to understand that a hike will be on the table for debate at the next meeting. The Fed's data-dependent approach in this tightening cycle suggests upcoming data releases could shift expectations."

Atlanta Federal Reserve President Raphael Bostic said on Wednesday the Fed should not raise rates further or it would risk "needlessly" sapping the strength of the U.S. economy.

The comments highlight the growing debate at the central bank over when and if the central bank should hike further.

"The next six months, as much as we would like to stop talking about the Fed, but it's going to be the continued driver of sentiment in the market," said Michael Dyer, investment director, multi assets at M&G Investments.

Elsewhere in Asia, Australia's S&P/ASX 200 index lost 1.57%, while Japan's Nikkei eased 0.12%. China and Hong Kong stock markets were closed for a holiday, leading to subdued trading.

HOW HIGH?

Investor attention will firmly be on Bank of England, with a rate increase widely expected and the only contention being how big the hike will be after inflation data came in hotter than expected on Wednesday.

Economists polled by Reuters last week were unanimous that the BoE would raise rates to 4.75%, their highest since 2008, from 4.5%, but the inflation data pushed financial markets to price in a nearly 50% chance that the BoE would opt for a bigger move and raise rates by half a percentage point.

"Where other central banks' concern is now slower-than-hoped easing, the UK is still seeing acceleration," said Taylor Nugent, an economist at National Australia Bank, referring to runaway UK inflation, which held at 8.7% in May.

Sterling last fetched $1.2765, hovering not far from a 14-month peak of $1.2849 it hit last week.

The euro was up 0.01% to $1.0988, having touched a one-month high of $1.09925 earlier in the session. The Japanese yen strengthened 0.11% to 141.70 per dollar.

Against a basket of currencies, the dollar rose 0.05% to 102.07, pinned near a one-month low of 102 it touched last week.

Apart from BoE, markets will also be awaiting a policy decision from Turkey's central bank, with a policy pivot and a sharp rate increase widely expected.

The Turkish lira has skidded to record lows since last month's election and was last at 23.56 per dollar.

Swiss National Bank and Norway's central bank are also expected to raise interest rates by 25 bps each.

U.S. crude fell 0.37% to $72.26 per barrel and Brent was at $76.86, down 0.34% on the day.

Spot gold dropped 0.1% to $1,929.69 an ounce, just above a three-month low it touched on Wednesday.