Asian markets fell on Wednesday after Wall Street fell the most since June 2020, as a report showed that 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 rose, with the Dow Industrials and S&P 500 contracts up 0.1%. European futures also fell.
On Tuesday, the Dow lost more than 1[ads1],250 points and the S&P 500 fell 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 sharp sell-off did not completely erase the market’s gains of the past four days, but it ended a four-day winning streak for the major US 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 Composite closed 5.2% lower at 11,633.57.
Bond prices also fell sharply, sending their yields higher, after a report showed inflation only slowed to 8.3% in Augustinstead of the 8.1% economists expected.
The yield on the two-year Treasury note, which tends to track 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 inflationwith all the risk to the economy that entails.
“Right now, it’s not the journey that’s a concern 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 seen as the most exposed to higher prices.
Most of Wall Street entered the day thinking the Fed would raise short-term interest rates by a hefty three-quarters of a percentage point at next week’s meeting. 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 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 that the Fed places particular emphasis on, such as inflation outside of food and energy prices.
Markets priced in a 0.6% increase 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 that the Fed will raise 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 the 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 the 2.25% to 2.50% range.
Higher prices hurt the economy by making it more expensive to buy a house, a car or anything else bought on credit. Mortgage interest has already reached its highest level since 2008, causing pain for the housing industry. The hope is that the Fed can start slowing the economy enough to stop high inflation, but not so much that it creates a painful recession.
Tuesday’s data cast doubt on hopes for such a “soft landing”. Higher interest rates also hurt the prices of shares, bonds and other investments.
Investments that are considered the most expensive or the most risky 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 rally for this year. The dollar has risen against other currencies largely because the Fed has increased 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. Benchmark U.S. 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.
AP Business Writers Stan Choe, Alex Veiga and Damian J. Troise contributed.