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 gained 0.1 percent on a monthly basis versus expectations for a 0.1 percent decline. In particular, core inflation, stripping out volatile food and energy prices, doubled to 0.6 percent.
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 percent on Wednesday, dragged lower by a 2.7 percent plunge in resources-heavy Australia, a 2.4 percent drop in Hong Kong’s Hang Seng index and a 1 percent fall in Chinese bluechips.
Japan’s Nikkei tumbled 2.3 percent.
After a heavy equity selloff overnight, both the S&P 500 futures and Nasdaq futures rose 0.3 percent. On Tuesday, the Dow Jones Industrial Average plunged 3.94 percent, the S&P 500 lost 4.2 percent, and the Nasdaq Composite dropped 5.16 percent.
“Markets have reacted violently to what I would consider to be a modest miss in US CPI,” said Scott Rundell, chief investment officer at Mutual Limited.
“Futures have stabilized, 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 at the conclusion of the FOMC’s policy meeting next week, with a 38 percent probability of a super-sized, 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 percent by end-2022 (75bps, 75bps, 25bps for the remaining three meetings). Decent odds of a 4.5 percent peak early 2023 is also reflected,” said Eugene Leow, senior rates strategist at Deutsche Bank.
