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Asian markets slipped on Wednesday after Wall Street fell the most since June 2020 as a report showed inflation has kept a surprisingly strong grip on the US economy.
Tokyo’s benchmark Nikkei 225 lost 2.8% in early trade on Wednesday to 27,816.58, while Sydney’s S&P/ASX 200 fell 2.5% to 6,834.80. In Seoul, the Kospi lost 2.6% to 2,386.29.
US futures edged higher, with the Dow Industrials and S&P 500 contracts up 0.1%. European futures also fell.
On Tuesday, the Dow lost more than 1,250 points and the S&P 500 sank 4.3%. Tuesday’s warmer-than-expected inflation report has traders bracing for the Federal Reserve to raise interest rates even more, raising risks to the economy.
The steep sell-off did not completely reverse the market’s gains over the past four days, but it ended a four-day winning streak for the major U.S. indexes and erased 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 closed 5.2% lower at 11,633.57.
Bond prices also fell sharply, sending their yields higher after a report showed inflation slowed to just 8.3% in August instead of the 8.1% economists expected.
The yield on the two-year Treasury note, which usually tracks expectations for Fed action, rose to 3.74% from 3.57% late Monday. The 10-year yield, which helps dictate where mortgage and other loan interest rates are headed, rose to 3.42% from 3.36%.
The warmer-than-expected reading has traders bracing for the Federal Reserve to eventually raise interest rates more than expected to fight inflation with all the risks to the economy that entails.
“Right now, it’s not the journey that worries as much as the destination,” said Brian Jacobsen, senior investment strategist at Allspring Global Investments. “If the Fed wants to hike and hold, the big question is at what level.
All but six of the stocks in the S&P 500 fell. Technology and other high-growth companies fell more than the rest of the market because they are considered the most exposed due to higher rates.
Most of Wall Street entered the day believing the Fed would raise its short-term key rate by a hefty three-quarters of a percentage point at its meeting next week. But the hope was that inflation was falling back to more normal levels after peaking in June at 9.1%.
Such a slowdown could allow the Fed to reduce the size of its rate hikes through the end of this year and then potentially hold steady through early 2023.
Tuesday’s report dashed some of those hopes. Many of the data points were worse than economists expected, including some the Fed is paying special attention to, such as inflation outside of food and energy prices.
Markets braced for a 0.6% rise in such prices in August from July, double what economists expected, said Gargi Chaudhuri, head of investment strategy at iShares.
Traders now see a one-in-three chance of the Fed raising benchmark interest rates by a full percentage point next week, quadrupling the usual move. No one in the futures market predicted such a rise a day earlier.
The Fed has already raised its benchmark interest rate four times this year, with the last two increases 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, a car or anything else bought on credit. Mortgage rates have already hit their highest level since 2008, causing pain for the housing industry. The hope is that the Fed can pull back on slowing the economy enough to stop high inflation, but not so much that it creates a painful recession.
Tuesday’s data cast doubt on the hope of such a “soft landing”. Higher interest rates also affect the prices of stocks, bonds and other investments.
Investments that are seen as the most expensive or riskiest are those that are hardest hit by higher interest rates. Bitcoin fell 9.4 percent.
Expectations of a more aggressive Fed also helped the dollar add to its already strong gains for this year. The dollar has largely risen against other currencies because the Fed has raised interest rates faster and by larger margins than many other central banks.
The dollar bought 144.59 Japanese yen, up from 144.57 yen late Tuesday. The euro rose to 0.9973 cents, up from 0.9969 cents.
Oil prices rose. U.S. benchmark crude oil added 38 cents to $87.69 a barrel. barrel in electronic trading on the New York Mercantile Exchange. It lost 47 cents to $87.31 on Tuesday. Brent crude, the international benchmark, rose 38 cents to $93.55 a barrel. barrel.
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AP Business Writers Stan Choe, Alex Veiga and Damian J. Troise contributed.
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