HONG KONG, RAW – Asian share markets fell on Friday, after red-hot US inflation data and hawkish comments from a Federal Reserve official fuelled bets on US interest rates being hiked more aggressively, and sent US Treasury yields jumping.

MSCI’s broadest index of Asia-Pacific shares outside Japan dropped 0.76 per cent, with most markets in the red, though a resurgence in property stocks helped greater China markets. Japanese markets were closed for a holiday.

An index tracking Hong Kong listed mainland property firms rose two per cent and one tracking onshore Chinese real estate gained one per cent after a media report that China will allow real estate firms easier access to pre-sale proceeds from residential projects, loosening a liquidity squeeze on the sector.

Broader moves across Asian stocks followed US data on Thursday which showed consumer prices surged 7.5 per cent last month on a year-over-year basis, topping economists’ estimates of 7.3 per cent and marking the biggest annual increase in inflation in 40 years.

Sentiment further soured after St. Louis Federal Reserve Bank President James Bullard said the data had made him “dramatically” more hawkish. Bullard, a voting member of the Fed’s rate-setting committee this year, said he now wanted a full percentage point of interest rate hikes by July 1.

 

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Though Bullard is one of the more hawkish Fed policymakers, contracts traded at CME Group priced in an 88 per cent chance of a 50 basis point hike in March and a nearly 95 per cent chance of at least 100 basis points by June, up sharply from before the data.

US markets overnight had sold off more aggressively than those in Asia did on Friday morning, the Dow Jones Industrial Average tumbled 1.47 per cent, the S&P 500 lost 1.81 per cent and the Nasdaq Composite dropped 2.1 per cent.

E-mini futures for the S&P 500 were 0.46 per cent lower in early Asian trading.

“Our view is that Asian shares were not as relatively overvalued as US equities so there should be some selective resilience,” said Lorraine Tan, Morningstar’s Director of Equity Research in Asia, while adding that the market was still digesting a higher cost of capital than it had been used to.

“Having said this, we think the market has factored in a rise in 10-year treasuries to 2.0-2.5 per cent. The risk and the fear that will lead to a sharper sell off is if yields move above this level.”

The yield on benchmark 10-year US Treasury yield hit two per cent for the first time since August 2019, and was last at 2.0329 per cent.

Two-year notes, which typically move in step with interest rate expectations, were yielding 1.5643 per cent having jumped sharply after the CPI data.

“That reaction is quite significant when you consider traders were supposedly expecting a 50-year high read on CPI,” said Matt Simpson, Senior Market Analyst, City Index.

“But with inflation adding a full 2.1 percentage points over the past four months alone, it’s a good job the Fed has ditched the term transitory,” Simpson said, noting the US central bank was no longer describing the rise in inflation as a temporary phase.

That jump drove significant volatility in currency markets on Thursday, sending the dollar to a five week high against the yen.

But these moves slowed late on Thursday as traders remembered the Fed is not the only central bank to be tightening policy, but the dollar remained on the front foot with the euro falling 0.2 per cent and the Australian and New Zealand dollars each dropped about 0.3 per cent.

The higher dollar weighed on oil prices, and US crude dipped 0.41 per cent to $US89.51 ($A123.99) a barrel. Brent crude fell 0.58 per cent to $US90.95 ($A125.99) per barrel.

Spot gold was down 0.05 per cent at $US1824.21 ($A2,526.97) per ounce.