Asian equities fall on US inflation, rising yields and oil surge

Friday's sell-off in Asia extended directly from Thursday's trading in the United States, where a stronger-than-expected producer price index and a further rise in Treasury yields led traders to see a significantly higher probability of a Federal Reserve rate increase at next week's meeting, a sharp jump from before the data. The increase in bond yields weighed most heavily on growth and technology stocks in the US on Thursday, and this pattern is now appearing in Asian tech-heavy indexes, with South Korea's Kospi and Japan's Nikkei both declining. Oil was another key factor in Thursday's trading, as Brent crude jumped over 6% and briefly traded above $108 a barrel amid supply fears linked to the Iran conflict, a development that increases inflation pressures and directly burdens energy-importing countries such as Japan and South Korea. With the US consumer price index report due Friday, markets are expected to remain nervous through the weekend, as another hot inflation figure would strengthen the case for a rate hike.

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Earlier:

• US equities ended lower as Treasury yields climbed and oil prices topped $100
• Americas market recap: Oil advanced 7%

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Asian markets are following Wall Street's poor performance on Thursday, with strong inflation figures, rising yields, and oil above $100 all moving in the same direction.

Summary:

• Japan's Nikkei declined roughly 2% and South Korea's Kospi fell about 3% in recent trading, extending the drop from Thursday on Wall Street
• Thursday marked the fourth straight losing day for US equities, with the Dow losing 0.60%, the S&P 500 0.58%, and the Nasdaq 0.65%
• US final-demand producer prices increased 0.4% in August, pushing the annual rate to 5.4% compared with the 5.3% consensus, after a July gain revised up to 0.1%
• Treasury yields rose steeply following the PPI release, with the 10-year yield heading toward 5% and the 30-year yield reaching about 5.31%, the highest since 2023
• Traders saw about a 70% probability of a 25-basis-point Fed rate increase at next week's gathering, up from roughly 62% ahead of the PPI numbers
• Brent crude jumped over 6% Thursday, briefly topping $108 a barrel, as the rally driven by the Iran conflict continued and boosted inflation concerns

Asian stock markets continued Wall Street's decline into Friday, with Japan's Nikkei down about 2% and South Korea's Kospi roughly 3% lower, as the region absorbed stronger-than-expected US inflation data, climbing bond yields, and a big jump in oil costs. This follows a fourth straight losing day on Wall Street, where the Dow Jones Industrial Average dropped 0.60%, the S&P 500 fell 0.58%, and the Nasdaq Composite slipped 0.65% on Thursday.

Thursday's US weakness was triggered by a producer price index reading that came in above expectations, with final-demand prices up 0.4% in August and the annual rate rising to 5.4% versus the 5.3% forecast, after a July gain revised upward to 0.1%. This data sent Treasury yields sharply higher, pushing the 10-year yield near the 5% mark and the 30-year yield to roughly 5.31%, a level last seen in 2023. Higher yields disproportionately affected technology and growth stocks in the US session because these companies depend heavily on future earnings that lose present value as rates climb, a pattern now appearing in Asian trading given the makeup of both the Kospi and Nikkei.

The inflation surprise significantly altered expectations for interest rates. Traders assessed around a 70% chance of a 25-basis-point Fed rate hike at next week's meeting, up from roughly 62% prior to Thursday's data. That repricing, together with ongoing Treasury buyback operations designed to manage the yield curve, contributed to a volatile session for US fixed income markets even as the Treasury Department continued a bond purchase program aimed at countering some upward pressure on borrowing costs.

Adding to the inflation and rates narrative was a sharp move in oil markets. Brent crude gained more than 6% on Thursday, briefly exceeding $108 a barrel before settling near $107.63, extending a rally fueled by rising tensions from the Iran conflict and its effect on regional energy infrastructure and shipping. Higher oil prices present a dual challenge for markets: they feed directly into inflation readings such as Thursday's PPI, and they act as a tax on growth for oil-importing economies, including Japan and South Korea. With the US CPI report due Friday, the combination of a hawkish rate repricing, elevated bond yields, and a firmer oil price is likely to keep both US and Asian markets sensitive to incoming data for the remainder of the week.