Asian markets slipped Wednesday after Wall Street fell the most since June 2020, after a report showed that inflation has maintained a surprisingly strong hold on the US economy.
The Nikkei 225 benchmark in Tokyo lost 2.8% in early trading Wednesday to 27,816.58, while the S&P/ASX 200 in Sydney fell 2.5% to 6,834.80. In Seoul, the Kospi lost 2.6% to 2,386.29.
US futures moved higher, with contracts for the Dow Industrials and the S&P 500 rising 0.1%. European futures also fell.
On Tuesday, the Dow lost more than 1,250 points and the S&P 500 fell 4.3%. Tuesday’s hotter-than-expected inflation report has traders braced for the Federal Reserve to hike interest rates even further, adding to risks to the economy.
The steep sell-off didn’t completely wipe out market gains over the past four days, but it ended a four-day winning streak for major US indices and canceled out an early rally in European markets.
The S&P 500 fell 4.3% to 3,932.69. The Dow fell 3.9% to 31,104.97 and the Nasdaq composite closed 5.2% lower at 11,633.57.
Bond prices also fell sharply, pushing their yields higher, after a report showed inflation only slowed to 8.3% in Augustinstead of the 8.1% economists had expected.
Two-year Treasury yields, which tend to follow expectations for Fed action, rose to 3.74% from 3.57% at the end of Monday. The 10-year interest rate, which partly determines where mortgages and rates for other loans go, rose from 3.36% to 3.42%.
Higher-than-expected reading means traders are bracing for the Federal Reserve to eventually raise interest rates more than expected fight inflationwith all the associated risks for the economy.
“Right now the journey is not so much a concern as the destination,” said Brian Jacobsen, senior investment strategist at Allspring Global Investments. “If the Fed wants to raise and hold, the big question is at what level.
All but six stocks in the S&P 500 fell. Technology and other high-growth companies fell more than the rest of the market as they are seen as the biggest risks of higher prices.
Most of Wall Street came up with the idea that the Fed would raise its key short-term interest rate by a hefty three-quarters of a percentage point at its meeting next week. But the hope was that inflation would return to more normal levels after peaking at 9.1% in June.
Such a slowdown could allow the Fed to reduce the size of its rate hikes through the end of this year and then potentially keep it stable through early 2023.
Tuesday’s report dashed some of those hopes. Many of the data points were worse than economists had expected, including some that the Fed is paying particular attention to, such as inflation outside of food and energy prices.
Markets went in for a 0.6% increase in such prices in August from July, double what economists had expected, said Gargi Chaudhuri, chief investment strategy at iShares.
Traders now see a one in three chance that the Fed will raise the benchmark by a full percentage point next week, a fourfold increase from its usual move. No one on the futures market had predicted such an increase the day before.
The Fed has already raised its benchmark rate four times this year, the last two times by three-quarters of a percentage point. The Federal Funds rate is currently in a range of 2.25% to 2.50%.
Higher rates hurt the economy by making it more expensive to buy a house, car, or anything else on credit. Mortgage Interests have already reached their highest level since 2008, leaving housing construction in pain. The hope is that the Fed can get through the tightrope by slowing the economy enough to stamp out high inflation, but not so much that it triggers a painful recession.
Tuesday’s data cast doubt on hopes for such a ‘soft landing’. Higher rates also hurt the prices of stocks, bonds and other investments.
Investments considered the most expensive or riskiest are hit hardest by higher interest rates. Bitcoin fell 9.4%.
Expectations for a more aggressive Fed also aided the dollar in its already strong gains for this year. The dollar has risen sharply against other currencies, largely because the Fed has raised interest rates faster and at wider margins than many other central banks.
The dollar bought 144.59 Japanese yen, down from 144.57 yen late Tuesday. The euro rose to 0.9973 cents, from 0.9969 cents.
Oil prices rose. US benchmark crude added 38 cents to $87.69 a barrel in electronic trading on the New York Mercantile Exchange. It lost 47 cents to $87.31 on Tuesday. Brent oil, the international price standard, climbed 38 cents to $93.55 a barrel.
AP Business writers Stan Choe, Alex Veiga, and Damian J. Troise contributed.