Asian markets pulled back on Wednesday after Wall Street fell the most since June 2020, as a report showed inflation has kept a surprisingly strong hold on the US economy.
Tokyo’s benchmark Nikkei 225 index lost 2.8% in early trading 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 were higher, with Dow Industrials and S&P 500 contracts rising 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 hotter-than-expected inflation report has traders bracing for the Federal Reserve to raise interest rates even higher, raising risks to the economy.
The sharp sell-off did not end market gains over the last four days, but it ended a four-day winning streak for major US indices and erased an early rally in European markets.
The S&P 500 sank 4.3% to 3,932.69. The Dow fell 3.9% to 31,104.97 and the Nasdaq Composite closed down 5.2% 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 had expected.
The two-year Treasury yield, which tends to follow expectations for Fed actions, soared to 3.74% from 3.57% late Monday. The 10-year yield, which helps determine where mortgage and other lending rates go, rose to 3.42% from 3.36%.
The higher-than-expected reading has traders bracing for the Federal Reserve to finally raise interest rates higher than expected to combat inflation, with all the risks to the economy that that entails.
“Right now, it’s not the journey that’s as worrying as the destination,” said Brian Jacobsen, senior investment strategist at Allspring Global Investments. “If the Fed wants to go up and hold, the big question is at what level.
All but six of the S&P 500 stocks fell. Technology and other high-growth companies fell more than the rest of the market because they are seen as most at risk from higher rates.
Most of Wall Street began the day thinking the Fed would raise its key short-term rate by three-quarters of a percentage point at its meeting next week. But the hope was that inflation would recede to more normal levels after peaking in June at 9.1%.
Such a slowdown could allow the Fed to scale back 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 pays particular attention to, such as inflation outside of food and energy prices.
Markets were focused on a 0.6% rise in such prices in August from July, double what economists had expected, said Gargi Chaudhuri, head of investment strategy at iShares.
Traders now see a one in three chance that the Fed will raise the benchmark rate by a full percentage point next week, quadrupling the usual move. No one in the futures market predicted such an uptick a day earlier.
The Fed has already raised its benchmark interest rate four times this year, with the last two hikes by three-quarters of a percentage point. The fed 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 reached their highest level since 2008, creating problems for the housing industry. The hope is that the Fed can manage to walk the tightrope of slowing the economy enough to eliminate high inflation, but not enough to create a painful recession.
Tuesday’s data cast doubt on hopes for a “soft landing.” The higher rates also affected the prices of stocks, bonds and other investments.
Investments seen as the most expensive or the most risky are the most affected by the higher rates. Bitcoin fell 9.4%.
Expectations of a more aggressive Fed also helped the dollar add to its already strong gains this year. The dollar has been rising against other currencies largely because the Fed has been raising rates faster and with larger spreads than many other central banks.
The dollar bought 144.59 Japanese yen, against 144.57 yen on Tuesday night. The euro rose to 0.9973 cents from 0.9969 cents.
Oil prices rose. Benchmark US crude rose 38 cents to $87.69 a barrel in electronic trading on the New York Mercantile Exchange. It lost 47 cents to $87.31 on Tuesday. Brent crude, the international price standard, rose 38 cents to $93.55 a barrel.
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AP business writers Stan Choe, Alex Veiga and Damian J. Troise contributed.
