Asian stocks, bonds, and currencies fell in the wake of the widespread sell-off on Wall Street after warmer-than-expected inflation data fueled bets on jumbo interest rate hikes by the Federal Reserve.
Swap traders are confident that the Fed will raise interest rates by three-quarters of a percentage point next week and some bets will appear for a full-point move. That leaves investors weighing the possibility of tighter conditions in a swath of markets after returning to risk-sensitive assets in recent days in hopes that inflation will cool further.
The two-year Treasury yield, the most sensitive to policy changes, rose further in Asia after jumping as much as 22 basis points, pushing it more than 30 basis points above the 10-year rate and deepening an inversion in what is usually a recession warning. Australia’s benchmark 10-year yield rose 10 basis points.
“The markets had desperately tried to turn a bullish case and fight the Fed, basically, and that’s a dangerous place to be,” said Carol Schleif, deputy chief investment officer at the BMO Family Office at Bloomberg TV. Looking ahead, he pointed to “a lot of fiscal stimulus on its way to the market to take part in the place of the monetary stimulus that’s being withdrawn.”
The U.S. consumer price index rose 0.1% from July after it was unchanged in the previous month, Labor Department data showed. Compared to the previous year, prices rose by 8.3%, a slight slowdown, but even more than the median estimate of 8.1%. The so-called core CPI, which eliminates the most volatile food and energy components, also exceeded forecasts.
The reversal in the markets casts a dark shadow over the debate over the outlook for the global economy and markets. The latest Bank of America Corp. survey showed that the number of investors expecting a recession has reached the highest level since May 2020.
A dollar gauge fluctuate after rising more than 1% in the CPI report. The greenback’s strength weighed on Asian currencies, with the Korean won falling about 1.5%. The People’s Bank of China set the daily benchmark rate for the Yuan at the strongest bias on record compared to the average estimate in a Bloomberg survey of analysts and traders.
“Many emerging markets are feeling the heat of the strength of the U.S. dollar,” said Chi Lo, senior market strategist for the Asia Pacific at BNP Paribas Asset Management, citing its greenback debt loads. “Only China can afford to challenge this global trend of rising rates by maintaining its easing policy stance.”
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Here are some key events to watch this week:
- UK CPI, Wednesday
- US PPI, Wednesday
- U.S. Commercial Inventories, Empire Manufacturing, Retail Sales, Initial Jobless Claims, Industrial Production, Thursday
- China Home Sales, Retail Sales, Industrial Production, Fixed Assets, Surveyed Unemployment Rate, Friday
- Euro area CPI, Friday
- U.S. University of Michigan Consumer Sentiment, Friday
Some of the main movements in the markets:
- S&P 500 futures rose 0.2% at 1:15 p.m. in Tokyo, after the index fell 4.3%.
- Nasdaq 100 futures gained 0.1%. The index fell by 5.5%
- The Topix index fell 1.8%
- Australia’s S&P/ASX 200 fell 2.4%
- The Hang Seng Index fell 2.6%
- Shanghai Composite Index Declined 1%
- The Kospi index lost 1.5%
- Euro Stoxx 50 futures fell 0.7%
- Bloomberg Dollar Spot Index fluctuated
- The euro rose 0.2% to 0.9985 against the dollar
- The Japanese yen rose 0.2% to 144.37 to the dollar.
- The yield on 10-year Treasuries advanced two basis points to 3.43%.
- Australia’s 10-year bond yield rose 10 basis points to 3.66%
- West Texas Intermediate crude fell 0.6% to $86.77 a barrel.
- Gold was at $1,700.30 an ounce
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