Asian stocks fell, mirroring losses in the US, as a surge in oil prices above $100 a barrel intensified concerns about accelerating inflation and the likelihood of higher global interest rates. The MSCI Asia Pacific Index slipped 0.8%, with benchmark gauges in Japan, South Korea, Taiwan, and Australia all experiencing declines. This downturn follows Wednesday's performance on Wall Street, where the S&P 500 Index closed down 0.5% and the Nasdaq 100 Index dropped 0.3%, primarily due to losses in major tech companies like Nvidia, Amazon, and Alphabet.
Brent crude oil climbed as high as $101.94, while West Texas Intermediate peaked at $97.79, the highest since May, after Iran indicated readiness for a more intense conflict in the Middle East. This rise in oil prices is fueling expectations of a renewed inflation spike, which is particularly critical as Washington prepares to release key consumer price data that could influence the Federal Reserve's decision on interest rates next week. The producer price index already rose 0.4% in August from the prior month and 5.4% from a year earlier, with core PPI (excluding food and energy) advancing 0.2% and 4.6% respectively.
Bond markets are also under pressure, with the US 10-year Treasury yield holding near Wednesday's high of 4.85%, a level last seen in late 2023. This is partly attributed to the US government's plan to buy up to $6 billion of longer-dated debt, which disappointed some investors who had anticipated a larger increase. Traders are boosting their bets on a Fed rate hike next week, with swaps implying about a 62% chance of a quarter-point increase at the September 15-16 meeting, up from 60% on Tuesday. Some Fed officials have indicated that the decision hinges on this week's economic reports. The European Central Bank has already implemented its second rate hike since February, responding to inflation concerns.
Analysts are noting the increasing entrenchment of inflation pressures due to the prolonged Middle East conflict. Clark Bellin at Bellwether Wealth stated that while interest rate movements can't directly lower oil prices, the Fed's role is to respond to inflationary pressures. Jeffrey Roach at Financial believes a rate hike next week appears likely given the current environment. Stephen Brown at Capital Economics added that even if the Fed doesn't hike this month, a move later this year is probable due to the still-hot PPI data. Brian Jacobsen at Annex Wealth Management suggested that a potential Fed hike next week might be symbolic, aimed at asserting independence and building credibility rather than directly fixing the inflation problem.
