Asian shares took a hit on Wednesday as Wall Street’s negative performance and a stronger dollar led traders to reduce their expectations for rate cuts by the Federal Reserve. This shift came after an unexpected increase in U.S. inflation, which raised the consumer price index (CPI) by 3.1% on an annual basis, surpassing forecasts of a 2.9% rise.
The stronger inflation data caused a reevaluation of the likelihood and timing of rate cuts by the Federal Reserve. As a result, futures now indicate approximately 87 basis points of easing priced in for the Fed this year, compared to the previous estimate of 110 bps before the data release and 160 bps at the end of last year. This shift in expectations put pressure on global stocks, which had experienced a strong rally at the end of 2023 due to bets on rate cuts by major central banks in 2024.
MSCI’s broadest index of Asia-Pacific shares outside Japan fell 0.8% in early trading, marking its fifth consecutive day of decline. The S&P 500 futures and Nasdaq futures remained relatively flat, while EUROSTOXX 50 futures experienced a 0.3% loss. Even Japan’s Nikkei, which had recently made gains and reached the 38,000 level, dropped by 0.7%. The previous surge in the Nikkei had been supported by a weakening yen; however, the currency strengthened to 150.63 per dollar. There are concerns that if the yen continues to strengthen, Japanese authorities may intervene to stabilize it.
Stocks in Hong Kong also suffered losses after the Lunar New Year holidays, with the Hang Seng Index declining by 0.8%. However, mainland China’s financial markets remained closed for the week.
The expectation that U.S. rates will stay elevated for a longer period than initially anticipated led to the benchmark 10-year Treasury yield reaching a two-month high of 4.3320%. The two-year Treasury yield, which reflects near-term interest rate expectations, stood at 4.6324%, also reaching a two-month peak. These increases in yields contributed to the dollar’s strength, bringing it close to a three-month high against a basket of currencies at 104.81.
The British pound stabilized at $1.2597, having briefly surged in the previous session following data showing weak wage growth in the UK. However, this slowdown is unlikely to prompt the Bank of England to expedite interest rate cuts. UK inflation data is expected to be released later in the day. In the cryptocurrency market, bitcoin retreated from the $50,000 level, settling at $49,496. Oil prices experienced a slight decline due to ongoing geopolitical tensions in the Middle East and Eastern Europe. U.S. crude fell 22 cents to $77.65 a barrel, while Brent futures eased 33 cents to $82.44. Gold remained relatively unchanged at $1,992.37 an ounce.
Asian shares suffered losses as Wall Street’s negative performance and stronger inflation data led to diminished expectations for rate cuts by the Federal Reserve. This shift in sentiment put pressure on global stocks, and Asian markets were not exempt from the decline. Additionally, the prospect of extended higher rates in the U.S. contributed to a stronger dollar. While the impact on other currencies and commodities remains to be seen, investors will closely monitor upcoming data releases and geopolitical developments in order to navigate these uncertain market conditions.
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