Asia markets gyrate as US inflation data boosts recession fear

The big question for markets is whether the latest US inflation print marks the peak. PHOTO: AFP

HONG KONG (REUTERS, BLOOMBERG) - Stocks in Asia gyrated while US equity futures pared declines on Thursday (July 14) as investors assessed the prospect of a recession on hardened expectations for more aggressive Federal Reserve rate hikes after sizzling US inflation data.

MSCI's broadest index of Asia-Pacific shares outside Japan lost 0.1 per cent, hovering just above the two-year low hit on Tuesday, while US Nasdaq futures shed 0.3 per cent.

Japan's Nikkei pared losses to rise 0.8 per cent, helped by the yen's weakness against the dollar boosting exporters.

After dropping earlier, Hong Kong's Hang Seng Index was up 0.2 per cent while the Shanghai Composite gained 0.3 per cent as tech shares advanced.

Singapore's Straits Times Index was down 0.7 per cent at 1.09pm local time after posting weaker-than-expected growth figures for the second quarter.

Overnight US data showed rising costs of fuel, food and rent drove the consumer price index (CPI) up 9.1 per cent last month, leading to worries that the Fed could raise rates by an enormous 100 basis points at its meeting next month rather than the 75 that had been expected.

The big question for markets is whether the latest US inflation print marks the peak. Commodity prices, pushed up this year in part by supply disruptions related to Russia's war in Ukraine, have moderated somewhat of late.

But higher costs could prove to be persistent and come alongside a global economy buckling under rate hikes.

"The concerning aspect in the CPI numbers was the breadth of increases," said Shane Oliver, chief economist at AMP, who said nearly 90 per cent of the US CPI components saw increases of more than 3 per cent.

Market pricing on the CME's Fedwatch tool currently indicates a 78 per cent chance of a 100 basis increase, though Mr Oliver said this could be a kneejerk reaction to the high CPI reading.

"I personally think the Fed will stick to 75 - which is still a high number - if they go to 100 it will look like they are panicking."

US two-year yields, which reflect interest rate expectations, were last at 3.121 per cent, just off an overnight four-week high, increasing their lead on US benchmark 10 year yields which were at 2.9558 per cent.

So-called yield curve inversion, when short-dated interest rates are higher than longer ones, is commonly seen as an indicator of a recession, and the gap between the two touched 25 basis points in early Asia.

This also is bad news for Asian economies and stocks.

Carlos Casanova, senior economist at UBP, said a recession in the US would mean less demand for Asian exports, with investors turning more "risk off" and moving money out of emerging markets, and forcing Asian central banks to raise rates themselves to avoid too currency depreciation.

"So far Bank of Korea and the Reserve Bank of New Zealand seem to be competing with each other to see who can be the most hawkish, but all the other central banks are lagging. We will see more rate hikes in Asia, which will lead to a deceleration in aggregate demand, credit growth, consumption and the like."

Singapore's central bank also tightened its monetary policy on Thursday, in an off-cycle move hoping to slow inflation, sending the local currency up 0.7 per cent.

Elsewhere in currency markets, the euro was hovering back just above parity with the dollar at US$1.00155. It briefly dipped to 99.98 US cents overnight, breaking below US$1 for the first time since December 2002.

The European central bank faces a dilemma of whether to let the currency fall further, pushing up already record high inflation, or fighting back with more rapid interest rate hikes increasing the damage to an economy already hit hard by high energy costs.

The dollar was also firm against other majors, rising over 138 yen for the fist time since September 1998.. The dollar index, which tracks the currency against six majors, was holding firm at 108.45.

Oil prices slightly extended their recent losses due to inflation concerns.

Brent crude futures for September fell 0.1 per cent, to US$99.49, and US West Texas Intermediate crude lost 0.15 per cent to US$96.17.

Gold faced heavy selling pressure as higher rates hurt the non-interest-bearing asset. The spot price was down 0.5 per cent at US$1725 an ounce.

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