Asian markets fell on Wednesday as a surprise surge in US inflation raised investor concerns over the direction of Federal Reserve policy.
They took their cue from Wall Street, where stocks retreated from records after data showed the biggest jump in US inflation in more than a decade.
The consumer price index spiked a higher-than-expected 5.4% in the 12 months ended in June, not seasonally adjusted, the highest rate since August 2008.
The US central bank has said repeatedly that stiff increases in consumer prices will be transitory but investors will be keenly waiting to hear from Fed Chair Jerome Powell, who will testify to Congress on Wednesday and Thursday.
Powell likely will find himself defending the Fed’s pledge to continue providing stimulus to the US economy until there has been substantial progress on lowering unemployment and getting inflation to hold above two percent.
“The key question for the Fed and markets in general is whether the sustained lift in inflation seen over the past couple of months is still likely to be transitory, or will it be more persistent, warranting an earlier normalisation in Fed policy,” senior economist Tapas Strickland of National Australia Bank said in a note.
All three main US indexes closed lower following the inflation data, with the Dow slipping 0.3%.
Asian markets followed Wall Street’s lead, with Tokyo closing 0.4% lower while Shanghai retreated 1.1% and Hong Kong fell 0.6%.
“Nowhere is probably going to be more nervous that the Fed finally blinks than Asia,” said OANDA’s Jeffrey Halley.
“With much of the region from Australia to Japan down the COVID-19 rabbit hole, emerging Asia, in particular, is in no position to tighten monetary policy to maintain those soft US dollar pegs if the US monetary policy direction starts diverging from the still ultra-soft one across Asia.”
New Zealand eases stimulus and boosts NZD amidst inflation
Wellington fell 0.5% after New Zealand’s central bank said it would ease its stimulus, ending its bond buying programme on July 23. The New Zealand dollar jumped 0.5% on the surprise move.
One of the few winners, Sydney was up 0.3% despite news that Australia’s most populous city will be in virus lockdown for at least another two weeks as it struggles to bring a fast-spreading outbreak of the Delta coronavirus variant under control.
Australian Prime Minister Scott Morrison on Tuesday announced extra support for businesses in New South Wales to help counteract the extended lockdown.
Among other Asian markets, Singapore, Bangkok, Jakarta and Seoul also saw losses while Taipei was flat.
London, Frankfurt and Paris all opened lower.
“All-in-all, Asia has a few challenges now. A potentially slowing recovery across the region as higher prices, components shortages and logistical challenges bite. ASEAN continues to face a COVID-19 nightmare which is now a real danger to growth forecasts,” said OANDA’s Halley.
“The last thing ASEAN and Asia, in general, need right now is the prospect of tightening monetary policy in the US, when policy settings in Asia can and must remain ultra-easy. Hopefully, the region dodges a Fed bullet tonight, but if Mr Powell talks taper, we could be in for an extended period of Asian currency and equity weakness,” he added.
Oil prices edged lower in Asian trade, with Brent down 0.4% and West Texas Intermediate off 0.5%.
Key figures around 0820 GMT
Tokyo – Nikkei 225: DOWN 0.4% at 28,608.49 (close)
Hong Kong – Hang Seng Index: DOWN 0.6% at 27,787.46 (close)
Shanghai – Composite: DOWN 1.1% at 3,528.50 (close)
New York – DOW: DOWN 0.3% at 34,888.79 (close)
London – FTSE 100: DOWN 0.5% at 7,090.90
Euro/dollar: UP at $1.1789 from $1.1787 at 2130 GMT Tuesday
Pound/dollar: UP at $1.3844 from $1.3810
Euro/pound: DOWN at 85.15 from 85.26 pence
Dollar/yen: DOWN at 110.51 from 110.62 yen
Brent North Sea crude: DOWN 0.4% at $76.17 (R1,123) per barrel
West Texas Intermediate: DOWN 0.5% at $74.85 (R1,103) per barrel
© Agence France-Presse