Asian equities slipped as Fed rate hike bets rose to a one-in-three chance by December. Oil firmed after the U.S. waived Iran sanctions. The CPI print due this month is the next catalyst.
Asian equities mostly slipped early Tuesday as traders repriced the odds of a Federal Reserve rate increase this year, while crude oil prices firmed after the U.S. waived sanctions on Iran.
The MSCI Asia Pacific index edged lower in morning trade, with benchmarks in Tokyo and Seoul posting losses. The move followed a shift in U.S. rate markets overnight: fed funds futures now imply roughly a one-in-three chance of a hike by December, up from near zero a month ago.
The repricing came after a run of data showing inflation running above the Fed's 2% target. Chicago Fed President Austan Goolsbee said last week the central bank must decide whether inflation is stuck at 3% to 4%, a scenario that would require higher rates. His comment reinforced the market's turn.
Oil added to the inflation story. Crude prices rose after the U.S. decision to waive sanctions on Iran, a move that normally signals more supply. Traders instead focused on the near-term pressure higher energy costs place on headline inflation. Brent crude climbed back above $80, though it remains well off the highs hit earlier this year.
Higher oil prices complicate the Fed's task by boosting headline inflation even as core measures show some easing. That dynamic weighed on Asian equities, particularly in import-dependent economies like India and the Philippines. The dollar firmed against regional currencies, adding to the headwinds.
Ten-year U.S. Treasury yields edged higher as rate-hike bets pulled rates up. Higher yields pressured growth stocks in Asia, with technology shares in Taiwan and South Korea taking the brunt of the selling. Gold prices dipped as the dollar rally and rising yields sapped demand for the non-yielding metal.
The simple read: rate expectations are driving stocks lower and the dollar higher. The better market read involves the interaction between oil and the rate path. If the Iran waiver eventually increases global supply, it could cap oil gains and ease headline inflation over the medium term. That effect takes time.
The immediate focus remains on U.S. data. The next major release is the consumer price index, due later this month.
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