Asian Markets Slump After US Inflation Rate Hits 13-Year High

• Jittery traders worried Fed will tighten monetary policy

• Analysts say Asia particularly vulnerable to US tapering

Asian markets fell on Wednesday after a surprise surge in US inflation raised investor concerns over the direction of Federal Reserve policy.

They took their cue from Wall Street, where stocks retreated from record highs after data showed the biggest jump in US inflation in more than a decade.

The consumer price index spiked a higher-than-expected 5.4% in the 12 months ended in June, not seasonally adjusted, the highest rate since August 2008.

Also on AF: Winners and Losers From China’s Sweeping Crackdown on Big Tech

The US central bank has said repeatedly that stiff increases in consumer prices will be transitory but investors will be keenly waiting to hear from Fed Chair Jerome Powell, who will testify to Congress on Wednesday and Thursday.

Powell likely will find himself defending the Fed’s pledge to continue providing stimulus to the US economy until there has been substantial progress on lowering unemployment and getting inflation to hold above 2%.

“The key question for the Fed and markets in general is whether the sustained lift in inflation seen over the past couple of months is still likely to be transitory, or will it be more persistent, warranting an earlier normalisation in Fed policy,” senior economist Tapas Strickland of National Australia Bank said in a note.

All three main US indexes closed lower following the inflation data, with the Dow slipping 0.3%.

NERVOUS TIMES

Asian markets followed Wall Street’s lead, with Tokyo closing lower while Shanghai retreated and Hong Kong fell too.

The Hang Seng Index slipped 0.63%, or 175.95 points, to 27,787.46. The benchmark Shanghai Composite Index fell 1.07%, or 38.02 points, to 3,528.50, while the Shenzhen Composite Index on China’s second exchange slid 0.88%, or 21.90 points, to 2,470.07.

The benchmark Nikkei 225 index fell 0.38%, or 109.75 points, to 28,608.49, while the broader Topix index slipped 0.23%, or 4.48 points, at 1,963.16.

“Nowhere is probably going to be more nervous that the Fed finally blinks than Asia,” said OANDA’s Jeffrey Halley.

SOFT DOLLAR

“With much of the region from Australia to Japan down the Covid-19 rabbit hole, emerging Asia, in particular, is in no position to tighten monetary policy to maintain those soft US dollar pegs if the US monetary policy direction starts diverging from the still ultra-soft one across Asia.”

Wellington fell 0.5% after New Zealand’s central bank said it would ease its stimulus, ending its bond buying programme on July 23. The New Zealand dollar jumped 0.5% on the surprise move.

One of the few winners, Sydney, was up 0.3% despite news that Australia’s most populous city will be in virus lockdown for at least another two weeks as it struggles to bring a fast-spreading outbreak of the Delta coronavirus variant under control.

Among other Asian markets, Singapore, Bangkok, Jakarta and Seoul also saw losses while Taipei was flat.

COMPONENT SHORTAGES

“All-in-all, Asia has a few challenges now. A potentially slowing recovery across the region as higher prices, components shortages and logistical challenges bite. ASEAN continues to face a Covid-19 nightmare which is now a real danger to growth forecasts,” said OANDA’s Halley.

“The last thing ASEAN and Asia, in general, need right now is the prospect of tightening monetary policy in the US, when policy settings in Asia can and must remain ultra-easy. Hopefully, the region dodges a Fed bullet tonight, but if Mr Powell talks taper, we could be in for an extended period of Asian currency and equity weakness,” he added.

Oil prices edged lower in Asian trade, with Brent down 0.4% and West Texas Intermediate off 0.5%.

MARKETS

Tokyo – Nikkei 225: DOWN 0.4% at 28,608.49 (close)

Hong Kong – Hang Seng Index: DOWN 0.6% at 27,787.46 (close)

Shanghai – Composite: DOWN 1.1% at 3,528.50 (close)

New York – DOW: DOWN 0.3% at 34,888.79 (close)