Most Asian equities sank yesterday, tracking a sell-off on Wall Street, as a forecast-topping US inflation report dealt a hefty blow to hopes for an early interest rate cut.
The dimming prospects of a dovish turn by the US Federal Reserve also sent the US dollar surging against the yen, forcing Japanese officials to warn they would intervene in forex markets to support the country’s currency.
Expectations for a rate cut have been doused in recent weeks by a series of strong indicators — particularly on the economy and jobs — while several monetary policymakers warned they want to see more data before shifting.
Photo: AFP
However, stocks continued to push higher in that time, with analysts saying the Fed had indicated it is still on course to cut this year, even if not as much as previously hoped. A small downward revision last week to inflation figures for the final few months of last year added to the upbeat mood.
However, Tuesday’s figures showed the consumer price index (CPI) and core prices eased less than expected, which came as a severe blow, leading investors to re-evaluate their outlook for rates this year. US inflation rose 3.1 percent on an annual basis, above forecasts for a 2.9 percent increase.
Eyes are now on producer price data due at the end of the week.
All three main indices on Wall Street fell more than 1 percent, with the Dow and S&P 500 coming down from about record highs.
US Treasury yields jumped and the so-called “fear gauge” VIX index rose at its fastest clip since October last year.
The “CPI report caught a lot of people off guard”, Chris Zaccarelli of Independent Advisor Alliance said. “Many investors were expecting the Fed to begin cutting rates and were spending a lot of time arguing that the Fed was taking too long to get started — not appreciating that inflation could be sticky and not continue down in a straight line.”
Saxo’s Redmond Wong said: “The hot CPI report has priced out a March rate cut, now seen with only 10 percent odds.”
The “May rate cut probability has also dropped to less than 40 percent from around 70 percent previously and the first rate cut is only seen in June,” Wong said.
Stephen Innes at SPI Asset Management called it “a bitter pill.”
“Suppose the other top-tier data released this month shows a hotter trend similar to the CPI report. In that case, it’s unlikely that the Federal Reserve will cut interest rates in May,” Innes said.
Asian traders ran for cover, with Tokyo, Sydney, Singapore, Seoul, Wellington, Mumbai and Bangkok well down.
However, Hong Kong rallied as it reopened after an extended break for the Lunar New Year. Tech giants led the way on hopes China’s leaders might announce further measures to support the country’s markets and stuttering economy.
London edged up at the open as data showed UK inflation held at 4 percent last month. Paris and Frankfurt were down.
Officials in Tokyo said they were keeping a close eye on developments and were ready to step in to support their currency.
“Some of the recent rapid moves are in line with fundamentals, but some are clearly speculative. I think the latter aren’t desirable,” Japanese Vice Minister of Finance for International Affairs Masato Kanda said yesterday. “Authorities are ready to respond 24 hours a day, 365 days a year.”
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