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Asian markets skidded lower on Wednesday after Wall Street fell the most since June 2020 as a report showed inflation has kept a surprisingly strong grip on the U.S. economy.
Tokyo’s benchmark Nikkei 225 lost 2.8% in early trading Wednesday, to 27,816.58, while Sydney's S&P/ASX 200 declined 2.5% to 6,834.80. In Seoul, the Kospi lost 2.6% to 2,386.29.
U.S. futures edged higher, with the contracts for the Dow industrials and the S&P 500 up 0.1%. European futures also declined.
On Tuesday, the Dow lost more than 1,250 points and the S&P 500 sank 4.3%. Tuesday's hotter-than-expected report on inflation has traders bracing for the Federal Reserve to raise interest rates still more, adding to risks for the economy.
The steep sell-off didn’t quite knock out the market’s gains over the past four days, but it ended a four-day winning streak for the major U.S. indexes and erased an early rally in European markets.
The S&P 500 sank 4.3% to 3,932.69. The Dow fell 3.9% to 31,104.97 and the Nasdaq composite closed 5.2% lower, at 11,633.57.
Bond prices also fell sharply, sending their yields higher, after a report showed inflation decelerated only to 8.3% in August, instead of the 8.1% economists expected.
The yield on the two-year Treasury, which tends to track expectations for Fed actions, soared to 3.74% from 3.57% late Monday. The 10-year yield, which helps dictate where mortgages and rates for other loans are heading, rose to 3.42% from 3.36%.
The hotter-than-expected reading has traders bracing for the Federal Reserve to ultimately raise interest rates more than expected to combat inflation, with all the risks for the economy that entails.
“Right now, it’s not the journey that’s a worry so much as the destination,” said Brian Jacobsen, senior investment strategist at Allspring Global Investments. “If the Fed wants to hike and hold, the big question is at what level.
All but six of the stocks in the S&P 500 fell. Technology and other high-growth companies fell more than the rest of the market because they’re seen as most at risk from higher rates.
Most of Wall Street came into the day thinking the Fed would hike its key short-term rate by a hefty three-quarters of a percentage point at its meeting next week. But the hope was that inflation was falling back to more normal levels after peaking in June at 9.1%.
Such a slowdown might let the Fed reduce the size of its rate hikes through the end of this year and then potentially hold steady through early 2023.
Tuesday’s report dashed some of those hopes. Many of the data points were worse than economists expected, including some the Fed pays particular attention to, such as inflation outside of food and energy prices.