SYDNEY: Asian stocks tumbled, the dollar held firm and the US yield curve was deeply inverted on Wednesday as a white-hot US inflation report dashed hopes of a peak in inflation and fueled bets that interest rates might need to be raised higher for longer .
Data from the US Department of Labor on Tuesday showed that the headline CPI rose 0.1 percent on a monthly basis, while a 0.1 percent decline was expected. In particular, core inflation, which excludes volatile food and energy prices, doubled to 0.6 percent.
Wall Street experienced its sharpest decline in two years, the safe-haven dollar posted its biggest jump since early 2020, and two-year Treasury yields, which are rising amid traders’ expectations for higher Fed fund rates, jumped to their highest levels since 15 years .
MSCI’s broadest index of Asia-Pacific stocks outside of Japan fell 1.3 percent in early Asian trade on Wednesday. Resource-rich Australia fell 2.8 percent, while Japan’s Nikkei fell 2.7 percent.
Both S&P 500 futures and Nasdaq futures rose 0.1 percent after a sharp selloff. The Dow Jones Industrial Average plunged 3.94 percent, the S&P 500 4.2 percent and the Nasdaq Composite 5.16 percent.
“Markets have reacted violently to what I would consider a modest failure in the US CPI. Stocks and bonds were smoked and taken to the principal’s office for a good, old-fashioned, old-fashioned pre-wake spanking,” said Scott Rundell. Chief Investment Officer at Mutual Limited.
“Futures have stabilized so we could see a dead cat ricochet tonight.”
Financial markets have now fully priced in a rate hike of at least 75 basis points by the close of next week’s FOMC meeting, with a 33 percent chance of an outsized full percentage point hike in the Fed’s target rate, according to CME’s FedWatch tool.
“With another 75 basis point hike more than fully priced into the market after the CPI report, there’s no reason for the Fed not to make another outsized move,” said Kevin Cummins, chief US economist at NatWest Markets.
“We now expect the FOMC to follow the big 75 basis point rate hike in July, a similar move of 75 basis points in November (vs. our previous 25 basis point request) and another 50 basis points in December to 4.25-4.50 percent (vs will follow our earlier request by 25 basis points.”
In FX markets, the US dollar held steady at 109.9 against a basket of major currencies after rising 1.4 percent overnight on the surprisingly strong US inflation report.
Against the interest rate-sensitive Japanese yen, it hovered near its 24-year high of 144.57 yen. The yen has been a victim of the Bank of Japan’s dovish monetary policy, in contrast to rate hikes elsewhere.
The two-year US Treasury yield hit a fresh 15-year high of 3.8040 percent on Friday as the curve distance to benchmark 10-year yields fluctuated 34 basis points, compared with 16 basis points a week ago.
Yield curve inversion is usually treated as a warning of a recession.
The yield on 10-year Treasury bills rose to 3.4448 percent from Tuesday’s US close of 3.423 percent.
Oil prices recovered somewhat on Friday after falling in the previous session. US crude rose 0.4 percent to $87.63 a barrel and Brent rose to $93.44, up 0.3 percent on the day.
Gold was slightly higher. Spot gold was trading at $1701.7526 an ounce.
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