TOKYO (Reuters) – Fear of inflation presses Asian equities and strengthened the dollar on Thursday after overnight data showed that US consumer prices rose at the fastest pace since 1990 last month, reinforcing arguments for a faster tightening of Federal Reserve policy.
Nominal interest rates on US government bonds shot higher, with the benchmark 10-year note rising the most since February, while real interest rates, which take inflation into account, fell to record lows.
Gold jumped to a five-month high and bitcoin broke records when investors sought inflation hedging.
Oil fell sharply from nearly seven years high after US President Joe Biden said his administration was looking for ways to reduce energy costs.
MSCI’s broadest index for equities in Asia and the Pacific outside Japan fell by 0.85%, led by a decline of 1.19% in Australia’s benchmark index.
Chinese blue chips fell 0.09%.
The Japanese Nikkei reversed the trend by rising 0.24%, supported by the yen’s weakness against a resurgent dollar and as US stock futures ticked slightly.
But during the night, the S&P 500 fell 0.82%, the worst day in more than a month. It marked the first back-to-back declines in a month, after the index closed at a record high to start the week.
The dollar index, which measures the currency against six major equals including the yen and the euro, hovered just below the high reached on Wednesday at 94,905, a level not seen since July last year.
The dollar added 0.13% to 114.04 yen, up from as low as 112.73 at the beginning of the week.
The US consumer price index rose by 6.2% year-on-year, with petrol leading to a broad increase that contributed to signs that inflation could remain uncomfortably high well into 2022 amid swirling global supply chains.
Inflationary pressures are also growing in the labor market, with other data on Wednesday showing that the number of Americans applying for unemployment benefits fell to a 20-month low.
Both the White House and the Fed have argued that prices will fall as supply bottlenecks begin to ease, and the central bank only reiterated last week that high inflation “is expected to be temporary” as decision-makers called for patience.
“The Fed’s determination is facing a test period,” Rodrigo Catril, a senior currency strategist at the National Australia Bank in Sydney, wrote in a customer note.
“Supply constraints may well turn out to be temporary, but the increase in nuclear factors is increasing the pressure on the Fed to trigger a monetary policy response.”
The money market is now pricing a first Fed rate hike until July.
Benchmark 10-year government interest rates rose the most in seven weeks to as high as 1.592% on Wednesday. The Treasury market is closed globally on Thursday for a US holiday.
At the same time, the return on 10-year government inflation-linked securities (TIPS) fell sharply to as low as an unprecedented -1.243% before drifting higher during the session.
Inflation expectations soared and five-year breakeven inflation rose to a record high of 3.113%
Volatility spread to other markets, where the CBOE Volatility index, Wall Street’s so-called fear meter, reached its highest level in almost a month.
Spot gold traded around $ 1,850 after rising as high as $ 1,868.20 overnight for the first time since mid-June.
Bitcoin initially rose to a new record of $ 69,000 before retreating to the last trade just under $ 65,000.
US West Texas Intermediate (WTI) crude rose 25 cents to $ 81.59 a barrel, but well after the night’s high of $ 84.97 and its seven-year high of $ 85.41 reached the end of last month.
Brent oil futures rose 30 cents to $ 82.94 a barrel, but down from as high as $ 85.50 on Wednesday and an October high of $ 86.70 in three years.