Asian equities fall on US inflation, rising yields and oil surge
Asian markets fell Friday as US inflation data and higher bond yields fueled rate hike expectations, with oil prices also surging.
Japan's wholesale inflation stayed hot in August, reinforcing expectations that the Bank of Japan will raise rates next week.
The corporate goods price index for August largely reflects what financial markets had already anticipated, with the Bank of Japan all but certain to lift its benchmark rate to 1.25% at its gathering next week. This limits the immediate surprise element for yen crosses. The import price index, which rose 24.8% from a year earlier, offers a more intriguing picture, indicating that sustained yen depreciation is feeding directly into domestic cost pressures rather than easing off as some market participants had expected. That keeps the more hawkish tail of rate expectations alive, with analysts now projecting an additional increase to 1.75% in the second quarter of 2027, bringing that timeline forward from previous estimates. For the Japanese yen, the latest figures back the broader story of a central bank playing catch-up on inflation, which should continue to support the currency against peers still far from their own tightening cycles, although a rate move that is already nearly fully factored in tends to trigger a smaller reaction on the day than the size of the adjustment might imply.
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Japan's wholesale price data came in above expectations once more, leaving the central bank with scant leeway to avoid tightening policy next week.
Summary:
Japan's wholesale inflation stayed elevated in August, according to data released on Friday, adding to the urgency for the Bank of Japan to raise interest rates at its upcoming policy meeting. The corporate goods price index, a measure of what companies charge each other for goods and services, increased 7.6% from a year earlier, surpassing a median market projection of 7.4% and following a revised 7.7% advance in July. On a month-over-month basis, the index edged down 0.2% in August after a revised 0.4% rise the preceding month.
The release comes after a series of hawkish signals from the BOJ that have already driven markets close to fully pricing in a rate increase to 1.25% from the current 1% at next week's gathering. BOJ Governor Kazuo Ueda has repeatedly cited wholesale inflation as a key metric the central bank is monitoring closely, because the speed at which companies can pass higher costs on to consumers helps determine how persistent the broader inflation picture is likely to be.
A large part of the pressure stemmed from import costs. The yen-based import price index climbed 24.8% year on year in August, easing from a revised 29.3% spike in July but still at historically high levels, highlighting how a weak yen continues to raise the price of goods and materials brought into the country. Rising fuel prices related to the ongoing Middle East conflict have compounded that strain, adding a second channel of inflation alongside currency weakness. Taken together, the BOJ has warned of the risk that Japan's inflation could exceed its target rather than stabilise at a sustainable level.
The central bank lifted rates to a 31-year peak of 1% in June, judging that Japan was approaching a durable attainment of its 2% inflation objective, before holding steady in July while signalling a strong chance of near-term tightening. Friday's figures do little to alter that trajectory. Analysts polled by Reuters now expect the BOJ to go ahead with a hike to 1.25% next week, followed by an additional increase to 1.75% in the second quarter of 2027, a timeline that has shifted forward as worries mount over both broadening domestic price pressures and continued yen weakness. With inflation running persistently above target across multiple measures, the path of least resistance for Japanese monetary policy continues to point toward further, and potentially earlier, tightening.
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Asian markets fell Friday as US inflation data and higher bond yields fueled rate hike expectations, with oil prices also surging.
New Zealand's manufacturing PMI fell to 53.1 in August from 54.3 but remains above the long-term average. Employment stalled at 50.0.
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US Treasury sold $22 billion in 30-year bonds at a high yield of 5.308%, with strong international demand.