Asian markets tumble as US inflation spike fans rate hike fears

HONG KONG • A forecast-busting surge in US inflation sent Asian markets tumbling yesterday, tracking a rout on Wall Street a day earlier as investors fret that the Federal Reserve will be forced to hike interest rates earlier than expected to avoid prices running out of control.

The MSCI Asia-Pacific Index slumped as much as 1.5 per cent, taking losses from a Feb 17 peak to 10 per cent, and wiping out all its gains for the year.

Tokyo closed down 2.5 per cent, Shanghai 1 per cent, while Hong Kong ended 1.8 per cent lower.

Seoul's Kospi index fell 1.25 per cent, while tech-rich Taipei - which has also been rocked by the imposition of new virus measures - tumbled 1.46 per cent.

Markets in Singapore, India, Indonesia, Malaysia and the Philippines were closed for a holiday.

Trading floors were already awash with red this week owing to growing fears that the blockbuster global economic recovery and vast stimulus measures will see a splurge in spending by pent-up, cashed-up shoppers that will strain supplies and push up prices.

Those concerns were given oxygen on Wednesday by figures showing US consumer inflation spiked at 4.2 per cent last month, far higher than estimates and the highest since 2008 just before the global financial crisis kicked in.

The advance was driven by a rally in commodities prices such as widely used copper, iron and lumber, which are sitting at record or multi-year highs.

Investors worry that the Federal Reserve will be forced to taper the ultra-loose monetary policies - including record-low interest rates - that have been a key driver of a more than year-long equities rally.

Tech firms, which blossomed during lockdowns as people were forced to stay home, have led the losses as they are more susceptible to higher interest rates.

The Fed has repeatedly insisted it expects such sharp spikes, but they will be transitory owing to last year's low base and policymakers will not make any adjustments until they are happy unemployment is under control and inflation is running hot for some time.

Investors are not convinced and there is growing unease that the Fed could lose control of the situation if it does not act in time, with analysts warning it could risk people's confidence in the institution.

Former Treasury secretary Lawrence Summers said: "I am very concerned that the Fed's analytical assessment that inflation is transitory, combined with its policy move towards not being pre-emptive with respect to inflation, will be to repeat the mistakes of the 1960s and 1970s (when inflation surged)."

A top Fed official said the twin surprises of weak jobs growth and strong inflation have not dented the Federal Reserve's plans to keep its support for the economy wide open.

"If we saw evidence that there was a risk of a persistent upward drift in inflation expectations, we would not hesitate to use our tools to offset that," Fed vice-chairman Richard Clarida said on Wednesday, adding that the economy was still far from out of the woods and recovery would likely take time.

Still, Ms Victoria Fernandez, at Crossmark Global Investment, said on Bloomberg TV: "The concern is that the markets have lost a little bit of confidence that the Fed has control of inflation."

Mr Ken Peng, head of Asia investment strategy at Citigroup's private-banking arm, said: "We need to kind of price in a more normal interest-rate environment, more normal inflation environment.

"The (stock market) shake-up could last a while longer. But I'm still not too worried because growth will come back to be the most important element once interest rates normalise."

AGENCE FRANCE-PRESSE, BLOOMBERG