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Business Maverick

Global bond selloff extends in Asia after US CPI: markets wrap

Global bond selloff extends in Asia after US CPI: markets wrap
Storage tanks at the Reliance Industries Ltd. oil refinery in Jamnagar, Gujarat, India, on Saturday, 31 July 2021. (Photo: Dhiraj Singh/Bloomberg via Getty Images)

Bonds in Asia fell sharply after higher-than-expected US inflation supported the view that the Federal Reserve is in no rush to cut interest rates.

Benchmark 10-year yields in Australia and New Zealand climbed by more than 10 basis points. Their Japanese counterpart rose to the highest since November. US Treasuries recovered slightly after a selloff on Wednesday lifted the 10-year yield by 18 basis points to above 4.5% for the first time in five months. 

A gauge of global bonds suffered its worst performance since February 2023 on Wednesday, while a Treasuries index showed its biggest decline since August 2022. 

Stocks also dropped across the region, led by Hong Kong and Australia, after the S&P 500 fell 1% and the Nasdaq 100 dropped 0.9% on Wednesday. South Korean stocks declined after President Yoon Suk Yeol’s party suffered a significant loss in parliamentary elections.

A dollar index was steady after touching its highest level this year on Wednesday. The yen inched higher after weakening to levels not seen since 1990 against the dollar in the prior session. The depreciation has sparked fresh speculation Japanese authorities might step into the market to support the currency

In China, the central bank ramped up support for the yuan against a resurgent greenback by setting the daily reference exchange rate at a level that topped estimates by a record.

The cross-asset moves followed March US core consumer price index, which excludes food and energy costs. The gauge increased 0.4% from February, more than the 0.3% consensus forecasts, to beat expectations for a third straight month.

“The fallout from the hotter-than-expected US inflation read overnight will reverberate across regional equity markets today,” said Tony Sycamore, a market analyst at IG Australia Pty. “Providing a cushion on the downside, weakness in key Asian currencies including the yen and the won, will provide support for the exporters.”

Investors are now signalling the US central bank will slash rates just twice this year, starting in September, less than the most recent Fed dot plot that indicated three 2024 cuts. At the start of the year, market pricing indicated six cuts were expected.

“Easy financial conditions continue to provide a significant tailwind to growth and inflation. As a result, the Fed is not done fighting inflation and rates will stay higher for longer,” said Torsten Slok at Apollo Global Management. “We are sticking to our view that the Fed will not cut rates in 2024.”

Former Treasury Secretary Lawrence Summers went a step further to say that one would have to “take seriously the possibility that the next rate move will be upwards rather than downwards.” Such a likelihood is somewhere in the 15% to 25% range, he told Bloomberg Television’s Wall Street Week with David Westin.

In China, consumer prices barely increased from a year earlier last month and industrial prices continued to slump, underscoring the deflationary pressures that remain a key threat to the economy’s recovery. 

Australian consumer inflation expectations ticked higher. Rates traders have started pricing for the potential that the Reserve Bank of Australia will end the year with no rate cuts at all.

Other data due for release includes Philippine trade figures. Markets are closed in Indonesia, Malaysia, India, Pakistan, Sri Lanka and Bangladesh.

Elsewhere, oil prices held gains on worries about further conflict in the Middle East. West Texas Intermediate, the US oil price, inched higher after rising more than 1% on Wednesday on news the US and its allies believe major missile or drone strikes by Iran or its proxies against military and government targets in Israel are imminent.

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