Asian markets plummet after Wall Street was hit by inflation data

Asian markets slid lower on Wednesday after Wall Street fell more since June 2020 as a report showed inflation held a surprisingly strong hold on the US economy.

The Tokyo Nikkei 225 NIK benchmark,
-2.18%
Wednesday lost 2.2% in early trading, while Sydney’s S & P / ASX 200 XJO,
-2.55%
fell 2.6%. In Seoul, the Kospi 180721,
-1.43%
it lost 1.5%. The Hong Kong HSI Hang Seng Index,
-2.53%
fell 2.2% and the Shanghai Composite fell 0.6%. Benchmark indices in Singapore STI,
-1.09%,
Taiwan Y9999,
-1.61%,
Malaysia FBMKLCI,
-0.56%
and Indonesia JAKIDX,
-0.53%
everything has fallen.

US futures rose, with contracts for Dow YM00 industrial stocks,
+ 0.26%
and the S&P 500 ES00,
+ 0.25%
up by 0.1%.

On Tuesday, the Dow lost more than 1,250 points and the S&P 500 fell 4.3%. Tuesday’s warmer-than-expected inflation report has traders bracing for the Federal Reserve to hike interest rates even further, increasing risks to the economy.

The strong sell-off hasn’t completely eliminated market gains over the past four days, but it has ended a four-day streak of wins for major US indices and canceled an initial rally in European markets.

The S&P 500 SPX,
-4.32%
fell 4.3% to 3,932.69. The Dow DJIA,
-3.94%
fell 3.9% to 31,104.97 and the Nasdaq Composite COMP,
-5.16%
closed down by 5.2%, at 11,633.57.

Bond prices also fell sharply, driving their yields up, after a report showed inflation decelerated to only 8.3% in August, instead of the 8.1% forecast by economists.

The two-year Treasury yield, which tends to follow expectations for Fed equities, rose to 3.74% from 3.57% at the end of Monday. The 10-year yield, which helps determine the direction of mortgages and rates for other loans, rose to 3.42% from 3.36%.

The warmer-than-expected reading has traders preparing for the Federal Reserve to eventually raise interest rates more than expected to fight inflation, with all the risks to the economy that this entails.

“Right now, it’s not the journey that worries as much as the destination,” said Brian Jacobsen, senior investment strategist at Allspring Global Investments. “If the Fed wants to rise and maintain, the big question is at what level.

All but six stocks in the S&P 500 fell. Tech and other high-growth companies have fallen more than the rest of the market because they are considered the most at risk due to higher rates.

Most of Wall Street came early in the day thinking the Fed would raise its key short-term rate by a whopping three-quarters of a percentage point at next week’s meeting. But the hope was that inflation would return to more normal levels after June’s peak of 9.1%.

Such a slowdown could allow the Fed to reduce the magnitude of its rate hikes until the end of this year and then remain stable until early 2023.

Tuesday’s report disappointed some of those hopes. Much of the data was worse than economists expected, including some that the Fed pays particular attention to, such as inflation outside of food and energy prices.

Markets have honed a 0.6% rise in those prices in August since July, double what economists expected, said Gargi Chaudhuri, head of investment strategy at iShares.

Traders now see a one in three chance that the Fed will raise the benchmark rate by a full percentage point next week, quadrupling the usual move. No one in the futures market expected such a rise the day before.

The Fed has already raised the benchmark interest rate four times this year, with the last two hikes of three-quarters of a percentage point. The federal funds rate is currently between 2.25% and 2.50%.

Higher rates damage the economy by making it more expensive to buy a home, car, or anything else bought on credit. Mortgage rates have already reached their highest level since 2008, creating problems for the real estate sector. The hope is that the Fed can complete the tightrope walk to slow the economy enough to stifle high inflation, but not so much as to create a painful recession.

Tuesday’s data cast doubt on hopes for such a “soft landing”. Higher rates have also hurt the prices of stocks, bonds and other investments.

Investments considered to be the most expensive or riskiest are those most affected by the highest rates. Bitcoin fell by 9.4%.

Expectations for a more aggressive Fed also helped the dollar increase its already strong gains for this year. The dollar rose against other currencies largely because the Fed hiked rates faster and with higher margins than many other central banks.

The USDJPY dollar,
-0.07%
bought 144.59 Japanese yen, up from 144.57 yen on Tuesday. The euro rose to 0.9973 cents, from 0.9969 cents.

Oil prices have risen. US reference crude CLV22,
+ 0.24%
added 38 cents to $ 87.69 per barrel in e-commerce on the New York Mercantile Exchange. It lost 47 cents to $ 87.31 on Tuesday. Brent crude BRNX22,
+ 0.20%,
the international price standard rose 38 cents to $ 93.55 per barrel.

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