SYDNEY — Asian shares tumbled, the dollar held firm and the U.S. yield curve was deeply inverted on Wednesday, as a white-hot U.S. inflation report dashed hopes for a peak in inflation and fueled bets that interest rates may have to be raised higher and for longer.
U.S. Labor Department data showed on Tuesday the headline Consumer Price Index gained 0.1% on a monthly basis versus 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 1.3% in early Asia trade on Wednesday. Resources-heavy Australia plunged 2.8%, while Japan’s Nikkei tumbled 2.7%.
Both S&P 500 futures and Nasdaq futures rose 0.1%, after a heavy sell-off. 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 U.S. CPI. Stocks and bonds were smoked, taken to the principal’s office for a good old-fashioned, old-school pre-woke thrashing,” 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 33% probability of a super-sized, full-percentage-point increase to the Fed funds target rate, according to CME’s FedWatch tool.
“With another 75bp hike more than fully priced into the market following the CPI report, there is no reason for the Fed not to deliver another super-sized move,” said Kevin Cummins, chief U.S. Economist at NatWest Markets.
“We now expect the FOMC to follow up July’s large 75bps rate increase with a similar 75bps move in November (up from our earlier 25bps call) and another 50bps in December to 4.25-4.50% (up from our earlier 25bps call).”
In the currency markets, the U.S. dollar held firm against a basket of major currencies at 109.9, after jumping 1.4% overnight on the surprisingly strong U.S. inflation report.
It hovered close to its 24-year peak against the rate-sensitive Japanese yen at 144.57 yen. The yen has been a victim of the dovish monetary stance from the Bank of Japan, in contrast with rate hikes elsewhere.
The two-year U.S. Treasury yield scaled a new 15-year high of 3.8040% on Friday, as the curve gap with the benchmark ten-year yields hovering around 34 basis points, compared with 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 3.4448% compared with its U.S. close of 3.423% on Tuesday.
Oil prices recovered some ground on Friday, after falling in the previous session. U.S. crude settled up 0.4% at $87.63 per barrel and Brent settled at $93.44, up 0.3% on the day.
Gold was slightly higher. Spot gold was traded at $1701.7526 per ounce.
(Reporting by Stella Qiu; Editing by Stephen Coates)