By ELAINE KURTENBACH – AP Business Writer
Asian markets slipped on Wednesday after Wall Street fell the most since June 2020, with a report showing inflation maintained a surprisingly strong grip on the US economy.
The benchmark Tokyo Nikkei 225 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 rose slightly, with contracts for Dow Jones Industrialists and the S&P 500 rising 0.1%. European futures also declined.
On Tuesday, the Dow lost more than 1,250 points and the S&P 500 fell 4.3%. Tuesday’s hotter-than-expected inflation report has traders bracing for the Federal Reserve to raise interest rates further, heightening risks to the economy.
The sharp sell-off didn’t quite wipe out market gains over the past four days, but it ended a four-day winning streak for major U.S. indices and erased an early rally in markets. Europeans.
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The S&P 500 fell 4.3% to 3,932.69. The Dow Jones fell 3.9% to 31,104.97 and the Nasdaq composite closed down 5.2% to 11,633.57.
Bond prices also fell sharply, pushing up their yields, after a report showed inflation slowed to just 8.3% in August, from the 8.1% expected by economists. .
The two-year Treasury yield, which tends to track Fed stock expectations, climbed to 3.74% from 3.57% late Monday. The 10-year yield, which helps dictate the direction of mortgages and other loan rates, 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 inflation, with all the risks to the economy that entails.
“Right now, it’s not so much the journey that’s of concern as the destination,” said Brian Jacobsen, senior investment strategist at Allspring Global Investments. “If the Fed wants to raise and hold, the big question is how high.
All but six S&P 500 stocks fell. Technology and other high-growth companies fell more than the rest of the market as they are considered most at risk from higher rates.
Most of Wall Street entered the day expecting the Fed to 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 fall back to more normal levels after peaking in June at 9.1%.
Such a slowdown could allow the Fed to scale back its rate hikes through the end of this year and then hold steady through early 2023.
Tuesday’s report dashed some of those hopes. Many data points were worse than economists expected, including some the Fed pays close attention to, such as inflation outside of food and energy prices.
Markets focused on a 0.6% rise in those 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 the benchmark rate by a full percentage point next week, four times more than usual. No one in the futures market expected such a rise a day earlier.
The Fed has already raised its benchmark interest rate four times this year, the last two increases by three-quarters of a percentage point. The federal 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, car, or anything else purchased on credit. Mortgage rates have already reached their highest level since 2008, creating difficulties for the housing industry. The hope is that the Fed can successfully walk the tightrope of slowing the economy enough to quell high inflation, but not so much as to create a painful recession.
Tuesday’s data cast doubt on hopes for such a “soft landing”. Higher rates also hurt the prices of stocks, bonds and other investments.
Investments considered the most expensive or riskiest are the hardest hit by rising rates. Bitcoin fell 9.4%.
Expectations of a more aggressive Fed also helped the dollar add to its already strong gains for this year. The dollar surged against other currencies largely because the Fed raised rates faster and with wider margins than many other central banks.
The dollar bought 144.59 Japanese yen, against 144.57 yen on Tuesday evening. The euro rose to 0.9973 cents from 0.9969 cents.
Oil prices have risen. Benchmark U.S. crude added 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, climbed 38 cents to $93.55 a barrel.
AP Business Writers Stan Choe, Alex Veiga, and Damian J. Troise contributed.
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