Markets Mostly Rise As Traders Try To Look Past Expected Rate Hikes

Most stock markets rose Friday, reversing early losses and a sell-off on Wall Street, as traders contemplate further interest rate hikes by central banks struggling to tame inflation.

With officials from the United States to Switzerland warning that more tightening will be needed, the Bank of Japan stood firm on its ultra-loose monetary policy, refusing to give in to calls for a shift to normalisation.

Equities have had a rough ride this week, with the Fed's closely watched "dot plot" guide on rates indicating it could announce another increase before the end of the year, while cutting less than initially hoped next year.

Those expectations were solidified Thursday with data showing US applications for US unemployment benefits fell to the lowest level since January last week, pointing to a still strong labour market.

Ian Lyngen at BMO Capital Markets said the reading "marginally increases the chances the Fed hikes in November and certainly reinforces the Fed's messaging regarding avoiding cuts as long as possible in 2024".

Bets on further tightening also pushed 10-year Treasury yields to a 16-year high.

In a sign that the spectre of inflation will linger for some time, central banks in Sweden, Norway and Switzerland all warned they would likely have to hike again at some point owing to sticky inflation.

While Fed decision-makers contemplate their next move, former St. Louis Fed boss James Bullard said they might have to keep raising to avoid a reaccelleration of inflation, which is still well above the bank's two percent target.

And former Treasury Secretary Lawrence Summers suggested officials were being overly optimistic on their economic outlook, adding they could be surprised by the pace of inflation while growth could slow more than expected.

A number of policymakers have said they were confident the United States can avoid recession even as they push rates to two-decade highs.

The prospect of borrowing costs staying higher for longer jolted Wall Street with all three main indexes ending more than one percent down.

But after a rocky start Asia enjoyed a broadly positive day.

Hong Kong and Shanghai jumped more than a percentage point, with analysts saying traders were readying themselves for the possibility of more stimulus measures out of China.

Sydney, Singapore, Mumbai, Bangkok, Taipei, Jakarta, Manila and Wellington also, though Tokyo and Seoul were in the red.

London Paris and Frankfurt also fell at the open.

The Bank of Japan kept its negative rates policy Friday and continued with yield curve control, maintaining a tight band in which bonds can move.

While Friday's decision was expected, it came as speculation swirls that the bank is considering moving away from its ultra-loose policies.

But despite calls for a more hawkish approach, its post-meeting statement said it "will not hesitate to take additional easing measures if necessary".

Traders are hoping for some guidance from Governor Kazuo Ueda on officials' plans for the future, with inflation still elevated: data Friday showed it came in higher than expected in August.

The meeting comes after Tokyo said it was keeping a close eye on forex markets after the yen sank to a fresh 10-month low against the dollar owing to the bank's refusal to move away from its soft policy even as the Fed tightens.

Tokyo - Nikkei 225: DOWN 0.5 percent at 32,402.41 (close)

Hong Kong - Hang Seng Index: UP 1.7 percent at 17,948.72

Shanghai - Composite: UP 1.6 percent at 3,132.43 (close)

London - FTSE 100: DOWN 0.3 percent at 7,654.34

Dollar/yen: UP at 148.37 yen from 147.57 yen on Thursday

Euro/dollar: DOWN at $1.0659 from $1.0661

Pound/dollar: DOWN at $1.2275 from $1.2292

Euro/pound: UP at 86.82 pence from 86.71 pence

West Texas Intermediate: UP 0.7 percent at $90.27 per barrel

Brent North Sea crude: UP 0.5 percent at $93.80 per barrel

New York - Dow: DOWN 1.1 percent at 34,070.42 (close)