Japan’s Nikkei dropped 2.0%, while Chinese blue chips shed 0.9%
Asian shares slipped to seven-week lows on Thursday after a shocking rise in U.S. inflation hit Wall Street and sent bond yields surging on worries the Federal Reserve might have to move early on tightening.
Higher inflation is a definite negative for equities, given the likely rates response, said Deutsche Bank macro strategist Alan Ruskin.
The more nominal GDP gains are dominated by higher inflation, especially wage inflation, the more the possible squeeze on profit margins. It plays to a more choppy, less bullish equity bias, he said.
MSCI’s broadest index of Asia-Pacific shares outside Japan declined 0.9%, though trade was thinned by holidays in a number of countries.
Japan’s Nikkei dropped 2.0% and hit its lowest since early January, while Chinese blue chips shed 0.9%.
Asian markets were already on the backfoot this week amid inflation concerns and a tech sell-off on Wall Street, and markets were further upset on Wednesday when Taiwan stocks tumbled on fears of a partial lockdown amid an outbreak of the virus.
Nasdaq futures added 0.4%, while S&P 500 futures gained 0.3%. But EUROSTOXX 50 futures were still catching up with overnight declines and shed 0.7%, while FTSE futures lost 0.5%.
Wall Street was caught off-guard when data showed U.S. consumer prices climbed by the most in nearly 12 years in April as booming demand amid a reopening economy met supply constraints at home and abroad.
The jump was largely due to outsized rise in airfares, used cars and lodging costs, which were all driven by the pandemic and likely transitory.
Fed officials were quick to play down the impact of one month’s numbers, with vice chair Richard Clarida saying stimulus would still be needed for “some time”.
It likely would take a very strong May jobs report, with sizable upward revisions to March and especially April, to get the Fed to start a discussion about tapering at its June meeting, said JPMorgan economist Michael S. Hanson.
We continue to expect the Fed to begin scaling back its pace of asset purchases early next year, he said.
Investors reacted by pricing in an 80% chance of a Fed rate hike as early as December next year.
Yields on 10-year Treasuries steadied at 1.68%, having jumped 7 basis points overnight in the biggest daily rise in two months. The yield curve also steepened markedly to reflect the risk of rising inflation.
That was a shot in the arm for the dollar, which had been buckling under the weight of rapidly expanding U.S. budget and trade deficits. The euro retreated to $1.2078, leaving behind a 10-week peak at $1.2180.
The dollar was at 109.66 yen, having hit a five-week top of 109.78 and well off this week’s low of 108.34. The dollar index hovered at 90.737, up from a 10-week trough of 89.979.