Asian shares tracked a negative lead from Wall Street on Wednesday, while the dollar and Treasury yields jumped as traders pared back expectations for the pace and scale of rate cuts by the Federal Reserve this year.
The latest shift in rate expectations came after an upside surprise in U.S. inflation on Tuesday which showed the consumer price index (CPI) rising 3.1% on an annual basis, above forecasts for a 2.9% increase.
Futures now point to about 87 basis points of easing priced in for the Fed this year, as compared to 110 bps prior to the data release and 160 bps at the end of last year.
That kept pressure on global stocks, which had rallied strongly towards the end of last year on aggressive bets for rate cuts by major central banks globally in 2024.
S&P 500 futures and Nasdaq futures were trading near flat. EUROSTOXX 50 futures lost 0.3%.
“The stronger data pushes back on the hope of a rate cut from the Federal Reserve any time soon,” said Daniela Hathorn, senior market analyst at Capital.com.
“We’ll likely have to wait for the second half of the year for the Fed to start cutting, but the issue isn’t so much whether the bank will cut rates this year, as that is an almost certainty at this point, but how many rate cuts there will be.”
Even Japan’s standout Nikkei (.N225), opens new tab was not spared from the beating and fell 0.7%, after gaining 2.9% in the previous session and topping the 38,000 level.
The recent move higher in the Nikkei was helped in part by a sliding yen , which had weakened past the key 150 per dollar level for the first time this year on Tuesday.
The yen last stood at 150.63 per dollar.
“If they do try intervention, I think it’ll be near… the (dollar/yen) high from October 2022 and the high we saw in mid-November,” said Tony Sycamore, a market analyst at IG, referring to intervention efforts from Japanese authorities to shore up the currency.
Japan’s top currency officials warned on Wednesday against what they described as rapid and speculative yen moves overnight.
Elsewhere, stocks in Hong Kong were likewise in the red in their first trading day following the Lunar New Year holidays. The Hang Seng Index (.HSI), opens new tab fell 0.8%.
Mainland China’s financial markets remain closed for the week.
HIGHER FOR LONGER
The prospect that U.S. rates are likely to stay elevated for longer than initially expected pushed the benchmark 10-year Treasury yield to an over two-month high of 4.3320% on Wednesday.
The two-year Treasury yield , which typically reflects near-term interest rate expectations, last stood at 4.6324%, having similarly scaled a two-month top of 4.6730% in the previous session.
That’s helped the greenback firm near a three-month peak against a basket of currencies at 104.81 . The dollar index hit its strongest level since November on Tuesday.
“The attendant, broad-based U.S. dollar surge admittedly reflects (the) corresponding surge in U.S. Treasury yields,” said Vishnu Varathan, chief economist for Asia ex-Japan at Mizuho Bank.
Sterling steadied at $1.2597.
The pound spiked briefly in the previous session on data showing British pay grew at the weakest pace in more than a year at the end of 2023, but the slowdown was probably not significant enough to spur the Bank of England into quicker action towards cutting interest rates.
UK inflation data is due later on Wednesday.
Oil prices meanwhile edged lower, reversing some of Tuesday’s gains as geopolitical tensions lingered in the Middle East and eastern Europ.
U.S. crude fell 22 cents to $77.65 a barrel. Brent futures eased 33 cents to $82.44.
Gold was little changed at $1,992.37 an ounce.
