Asian shares tumble as bets on are on for higher rates

Sydney — Asian shares tumbled, the dollar held firm and two-year treasury yields hit a new 15-year high on Wednesday, as a US inflation report dashed hopes for a peak in inflation, fuelling bets rates may have to be raised higher for longer.

US labor department data showed on Tuesday the headline Consumer Price Index (CPI) gained 0.1% on a monthly basis vs expectations for a 0.1% decline. In particular, core inflation, stripping out volatile food and energy prices, doubled to 0.6%.

Wall Street saw its steepest fall in two years, the safe-haven dollar posted its biggest jump since early 2020 and two-year treasury yields, which rise with traders’ expectations of higher Fed fund rates, jumped to the highest level in 15 years.

MSCI’s broadest index of Asia-Pacific shares outside Japan fell 2.1% on Wednesday, dragged lower by a 2.7% plunge in resources-heavy Australia, a 2.4% drop in Hong Kong’s Hang Seng index and a 1% fall in Chinese bluechips.

Japan’s Nikkei tumbled 2.3%.

After a heavy equity sell-off overnight, both the S&P 500 futures and Nasdaq futures rose 0.3%. On Tuesday, the Dow Jones Industrial Average plunged 3.94%, the S&P 500 lost 4.2%, and the Nasdaq Composite dropped 5.16%.

“Markets have reacted violently to what I would consider to be a modest miss in US CPI,” said Scott Rundell, CIO at Mutual Limited.

“Futures have stabilised, so we might see a dead-cat bounce tonight.”

Financial markets now have fully priced in an interest-rate hike of at least 75 basis points (bps) at the conclusion of the Federal Open Market Committee’s (FOMC) policy meeting next week, with a 38% probability of a supersized, full-percentage-point increase to the Fed funds target rate, according to CME’s FedWatch tool.

A day earlier, the probability of a 100 bps hike was zero.

“USD rates are now pricing in a Fed funds rate of 4.25% by end-2022 (75 bps, 75 bps, 25 bps for the remaining three meetings). Decent odds of a 4.5% peak early 2023 is also reflected,” said Eugene Leow, senior rates strategist at Deutsche Bank.

“While resilient growth and slowing inflation can make for a better risk-taking environment, the US economy now looks too hot still. With no clear signs of the labour market slowing and inflation still problematic, a downshift from the Fed looks set to be delayed again.”

In the currency markets, the US dollar held firm against a basket of major currencies at 109.8, after jumping 1.4% overnight on the surprisingly strong US inflation report.

It hovered close to its 24-year peak against the rate-sensitive Japanese yen at 144.4 yen. The yen has been a victim of the dovish monetary stance from the Bank of Japan (BoJ), in contrast with rate hikes elsewhere.

The two-year US treasury yield scaled a new 15-year high of 3.8040% on Friday before retreating to 3.777%, and its curve gap with the benchmark ten-year yields hovering around 34 bps, compared with just 16 bps a week ago.

The yield curve inversion is usually treated as a warning of recession.

The yield on 10-year treasury notes rose to 3.4273% compared with its US close of 3.423% on Tuesday.

Oil prices recovered some ground on Friday, after falling in the previous session. US crude settled up 0.3% at $87.57 a barrel and Brent settled at $93.38, up 0.2% on the day.

Gold was slightly higher. Spot gold was traded at $1701.7526 per ounce.

Reuters