Asian markets witnessed a sharp decline on Thursday, April 11th, as concerns over persistent US inflation spooked investors. This follows data released on Wednesday showing US consumer prices rose more than expected in March, effectively dashing hopes of an interest rate cut from the Federal Reserve this year.
Domino Effect: US Inflation Jitters Hit Asia: The news triggered a domino effect across Asia. MSCI's broadest index of Asia-Pacific shares outside Japan fell by 0.7%, while Japan's Nikkei index dropped a steeper 0.8%. Stock markets in China and Hong Kong also felt the pressure, with the blue-chip CSI 300 index easing 0.4% and the Hang Seng index falling by 1.1%.
Hot Inflation Dampens Rate Cut Hopes: The primary culprit behind the market selloff was the unexpected rise in US inflation. Data showed core CPI (consumer price index) advanced by 0.4% in March, exceeding forecasts of a 0.3% increase. This marks the third consecutive month of stronger-than-expected inflation readings, forcing investors to reassess their expectations for the Federal Reserve's monetary policy.
Fed Minutes Reveal Policy Shift: Further fueling market anxiety were the recently released minutes from the Federal Reserve's March meeting. These minutes revealed growing concerns among Fed officials that inflation might not be cooling down as anticipated. Some officials even hinted that the current interest rate might not be restrictive enough to curb inflation effectively.
Investor Bets on Rate Cuts Shifted: Investors who were previously optimistic about a potential rate cut in June have now shifted their focus to September as the most likely timeframe for the easing cycle to begin. The total expected easing for this year has been revised downwards to just 42 basis points, significantly lower than the Fed's own projection of 75 basis points.
Dollar Soars, Yen Plummets: The strong dollar emerged as another major theme in the market. The US dollar index surged to a five-month high against its major peers, fueled by the inflation data and shifting expectations around Fed policy. This strength was particularly evident against the Japanese yen, which plunged to a staggering 34-year low of 153.24 yen per dollar.
Japan Considers Intervention to Stabilize Yen: The rapid depreciation of the yen has raised concerns about potential intervention by Japanese authorities. Masato Kanda, Japan's top currency diplomat, warned that the government would not rule out any measures to address disorderly currency market movements.
Bond Yields Rise Across Asia: The Asian bond market also mirrored the global sell-off in US Treasuries. Yields on government bonds across the region jumped significantly, reflecting investor expectations of a more hawkish stance from the Fed.
Oil Prices Edge Up on Geopolitical Tensions: Oil prices, however, managed to hold onto their gains despite the broader market weakness. This resilience was likely due to ongoing geopolitical tensions in the Middle East, following an Israeli strike that killed three sons of a Hamas leader.
Looking Ahead: Focus on ECB Meeting and US Economic Data
Market participants now await the outcome of the European Central Bank (ECB) policy meeting later today. While the ECB is expected to maintain current interest rates, any indication of a potential rate cut in June could significantly impact markets. Additionally, the release of US producer price data will be closely watched for further clues about inflationary pressures in the US economy. The recent market volatility highlights the sensitivity of global markets to changes in US monetary policy. As the Fed navigates the challenge of controlling inflation without hindering economic growth, investors can expect continued volatility and uncertainty in the coming months.
