The upswing in Asian equities came to a halt as Treasury yields surged, driven by US inflation data that reinforced expectations of Federal Reserve interest rate hikes. In addition, the latest data revealing continued economic weaknesses in China deepened the sense of pessimism in the markets.
MSCI’s Asia Pacific Index declined by over 1%, putting an end to a six-day winning streak. Several of the region’s benchmark indexes saw losses. Both Hong Kong and mainland Chinese shares extended their declines, as consumer and producer prices fell below estimates, indicating persistent economic challenges despite the Chinese government’s efforts to implement support measures.
Hebe Chen, an analyst at IG Markets, remarked, “Asia markets are facing a double blow, which raises significant doubts about the optimism-driven rally of the past few days. The earlier optimism, based on the assumption of a dovish turn by the Fed, now appears vulnerable. Moreover, China’s disappointing zero CPI figures serve as a warning signal.”
The likelihood of another quarter-point Fed rate hike, as indicated by swap contracts, increased to around 40%, up from approximately 30% the previous Wednesday. This shift followed a 0.3% increase in the US core consumer price index (which excludes food and energy costs) last month. Economists generally consider the core index a better gauge of underlying inflation than the overall consumer price index, which rose by 0.4%, mainly due to increased energy costs. Forecasts had called for a 0.3% monthly gain in both measures.
China’s trade data was only marginally better than expected, and Chinese authorities are exploring the possibility of establishing a state-backed stabilization fund to boost confidence in the nation’s $9.5 trillion stock market.
In the Asian market, Treasuries saw a slight gain after experiencing declines in the previous session. The yield on the 30-year rate surged by as much as 19 basis points following a $20 billion auction of these securities, which received weak demand.
The US dollar stabilized after gaining strength against all its Group-of-10 counterparts on Thursday due to the increase in Treasury yields. The Japanese yen edged closer to the 150 mark.
Nadia Lovell, senior equity strategist at UBS Global Wealth Management, stated on Bloomberg Television, “The Fed will want flexibility and options regarding an additional rate hike, just given the fact that inflation could stall out at a higher level. It’s much easier to lean hawkish in an environment of robust economic growth and then dial that back if necessary, rather than to be dovish just in case inflation unexpectedly surges.”
In other markets, oil was on track for a moderate weekly gain, with concerns over the Israel-Hamas conflict being balanced by signs of weakening demand. Gold stabilized.
