Asian shares slipped to seven-week lows on Thursday after a dismaying rise in US inflation bludgeoned 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”.
MSCI’s broadest index of Asia-Pacific shares outside Japan lost 0.6%, though trade was thinned by holidays in several countries.
Japan’s Nikkei fell 1.8%, and touched its lowest since early January, while Chinese blue chips lost 0.7%.
Asian markets were already on the backfoot this week amid inflation worries and a tech sell-off on Wall Street and nerves were further jangled on Wednesday when Taiwan stocks tumbled on fears the island could face a partial lockdown amid an outbreak of the virus.
Nasdaq futures were trying to rally with a gain of 0.5%, while S&P 500 futures added 0.4%. But EURO STOXX 50futures were still catching up with overnight falls and lost 0.5%, while FTSE futures shed 0.3%.
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”.
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 climbed 7 basis points overnight in the biggest daily rise in two months. The yield curve also steepened markedly.
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 $1.2082, leaving behind a 10-week peak at $1.2180.
The dollar stood at 109.60 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 90.672, up from a 10-week trough of 89.979.