Asia stocks drop as Fed rate hikes back in focus: Markets wrap

The rally in Asian equities halted as Treasury yields surged after US inflation data bolstered bets on Federal Reserve rate hikes. The latest data on continued weakness in China’s economy added to the gloom.

MSCI’s Asia Pacific Index fell more than 1%, on course to snap a six-day winning streak, with several of the region’s benchmark indexes in the red. Hong Kong and mainland Chinese shares extended losses after both consumer and producer prices came in below estimates, a sign that the country’s economy still faces drags despite the government rolling out a series of support measures.

“Asia markets are facing a double whammy that cast significant doubts on the optimism-driven rally of the past few days,” said Hebe Chen, an analyst at IG Markets. “The earlier optimism, built on the assumption of a dovish turn by the Fed, now seems vulnerable. Additionally, China’s disappointing zero CPI figures signal a yellow-light alarm.”

Swap contracts pushed the odds of another quarter-point Fed hike to about 40% — from closer to 30% Wednesday after the core consumer price index, which excludes food and energy costs, rose 0.3% in the US last month. Economists favor the core gauge as a better indicator of underlying inflation than the overall CPI, which climbed 0.4%, boosted by energy costs. Forecasters had called for a 0.3% monthly advance in both measures.

China’s trade data was only slightly better than expectation and the authorities are also considering forming a state-backed stabilization fund to shore up confidence in the nation’s $9.5 trillion stock market.

Treasuries gained slightly in Asia after dropping across the curve in the previous session, with the yield on the 30-year rate surging as much as 19 basis points after a $20 billion auction of the securities drew weak demand.

The dollar steadied after strengthening against all of its Group-of-10 peers Thursday following the increase in Treasury yields. The yen inched closer to the 150 mark.

The Fed will want flexibility optionality around an additional rate hike, “just given the fact that inflation could stall out at a higher level,” Nadia Lovell, senior equity strategist at UBS Global Wealth Management, said on Bloomberg Television. “It’s a much easier to tilt hawkish in an environment where economic growth is strong and then dial that back if you need to than to be dovish just in case inflation surprises to the upside.”

Elsewhere, oil headed for a modest weekly gain as fears over the Israel-Hamas conflict were offset by signs of flagging demand. Gold steadied.

Key events this week:

Eurozone industrial production, Friday
US University of Michigan consumer sentiment, Friday
Citigroup, JPMorgan, Wells Fargo, BlackRock results as the quarterly earnings season kicks off, Friday
G20 finance ministers and central bankers meet as part of IMF gathering, Friday
ECB President Christine Lagarde, IMF Managing Director Kristalina Georgieva speak on IMF panel, Friday
Fed’s Patrick Harker speaks, Friday

Some of the main moves in markets:

Stocks

S&P 500 futures rose 0.1% as of 1:19 p.m. Tokyo time. The S&P 500 fell 0.6%
Nasdaq 100 futures were little changed. The Nasdaq 100 dropped 0.4%
Japan’s Topix slid 1.4%
Hong Kong’s Hang Seng Index tumbled 2.1%
China’s Shanghai Composite Index slid 0.6%
Australia’s S&P/ASX 200 Index dropped 0.5%

Currencies

The Bloomberg Dollar Spot Index fell 0.1%
The euro rose 0.2% to $1.0546
The Japanese yen was little changed at 149.70 per dollar
The offshore yuan fell 0.2% to 7.3067 per dollar
The Australian dollar rose 0.2% to $0.6326

Cryptocurrencies

Bitcoin rose 0.2% to $26,790.07
Ether rose 0.3% to $1,540.63

Bonds

The yield on 10-year Treasuries declined three basis points to 4.67%
Australia’s 10-year yield advanced 11 basis points to 4.48%

Commodities

West Texas Intermediate crude rose 0.9% to $83.64 a barrel
Spot gold rose 0.3% to $1 874.99 an ounce