Asian stocks sag with dollar as hawkish Fed spurs recession fears

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By Kevin Buckland

TOKYO (Reuters) - Asian stocks sagged on Thursday, tracking declines on Wall Street, after the U.S. Federal Reserve projected higher interest rates for a longer period.

U.S. Treasury yields remained depressed and the curve deeply inverted as traders continued to fret that tighter policy will trigger a recession. The U.S. dollar languished near a six-month low against major peers.

Crude oil, though, continued to firm after bouncing off last week's nearly one-year low, with OPEC and the IEA forecasting a recovery in demand next year as China's economy reopens.

Japan's Nikkei eased 0.17%, while South Korea's Kospi dropped 0.92% and Australia's stock benchmark fell 0.4%.

Hong Kong's Hang Seng tumbled 1.71% and mainland Chinese blue chips declined 0.51%.

MSCI's broadest index of Asia-Pacific shares slumped 0.91%, after climbing as high as 160.37 in the previous session for the first time since late August.

Overnight, the U.S. S&P 500 lost 0.61%, although e-Mini futures pointed to a slight 0.06% bounce for Thursday's reopen.

Fed Chair Jerome Powell said on Wednesday that the central bank will deliver more rate hikes next year even as the economy slips towards a possible recession, arguing that a higher cost would be paid if the U.S. central bank does not get a firmer grip on inflation.

The comments followed the Fed's decision to raise the benchmark rate by an as-expected half a percentage point - down from recent 75 basis point increases - but projected a terminal rate above 5%, a level not seen since a steep economic downturn in 2007.

"This is a very hawkish signal from the Fed: a substantially higher terminal rate than back in September that also has a real upside risk attached to it," TD Securities analysts wrote in a client note.

"The Fed essentially acknowledged at this meeting that inflation is likely to remain stickier than initially expected, necessitating a more restrictive policy stance, which will end up pushing the U.S. economy in a recession in 2023," they added.

"The weakening in risk assets and the flattening of the curve suggest that recession fears may be the dominant driver of market price action."

The 10-year Treasury yield slipped back below 3.5% in Tokyo trading, with the two-year yield also edging lower to under 4.24%.

The spread between them also widened slightly to negative 74.3 basis points. An inverted yield curve has been a reliable indicator of recessions in the past.

The dollar index - which measures the greenback against six top peers, including the euro and sterling - held close to the overnight low of 103.44, a level not seen since June 16. It last stood 0.09% stronger at 103.75.

The euro eased 0.15% to $1.0664, but still near Wednesday's more-than-six-month peak at $1.0695.

Sterling edged 0.19% lower to $1.2405, remaining not far from an overnight top at $1.2446, also the strongest in just over six months.

Investors' eyes will now be trained on policy decisions from the European Central Bank and Bank of England later in the global day, as officials there also stood ready to hike rates again against the rising risks of fomenting recessions.

Crude oil traders took a more optimistic view on the global economy though, cheered by projections from OPEC and the International Energy Agency.

OPEC said it expects oil demand to grow by 2.25 million barrels per day (bpd) over next year to 101.8 million bpd.

The IEA raised its 2023 oil demand growth estimate to 1.7 million bpd for a total of 101.6 million bpd.

Brent crude futures rose by 1 cent $82.71 after closing Wednesday's session up $2.02, while U.S. West Texas Intermediate (WTI) crude futures fell by 4 cents to $77.24 per barrel, following a $1.94 rise the previous session.