- A forecast-busting surge in US inflation sent Asian markets tumbling on Thursday, tracking a rout on Wall Street.
- Investors fret that the Federal Reserve will be forced to hike interest rates earlier than expected to avoid prices running out of control.
- All Asian markets were deep in the red, with Tokyo losing more than 2% and Hong Kong was off more than 1%.
A forecast-busting surge in US inflation sent Asian markets tumbling on Thursday, tracking a rout on Wall Street as investors fret that the Federal Reserve will be forced to hike interest rates earlier than expected to avoid prices running out of control.
Trading floors were already awash with red this week owing to growing fears that the blockbuster global economic recovery and vast stimulus measures will see a splurge in spending by pent-up, cashed-up shoppers that will strain supplies and push up costs.
And those concerns were given oxygen Wednesday by figures showing US consumer inflation spiked at 4.2% in April, far higher than estimates and the highest since 2008 just before the global financial crisis kicked in.
The advance was driven by a rally in commodities prices such as widely used copper, iron and lumber, which are sitting at record or multi-year highs.
All three main indexes in New York plunged at least two percent on worries the Federal Reserve will be forced to taper the ultra-loose monetary policies - including record-low interest rates - that have been a key driver of a more than year-long equities rally.
Tech firms, which blossomed during lockdowns as people were forced to stay home, have led the losses as they are more susceptible to higher interest rates.
The Fed has repeatedly insisted it expects such sharp spikes but they will be transitory owing to last year's low base and policymakers will not make any adjustments until they are happy unemployment is under control and inflation is running hot for some time.
However, investors are not convinced and there is growing unease that the central bank could lose control of the situation if it does not act in time, with analysts warning it could risk people's confidence in the institution.
Former Treasury secretary Lawrence Summers said: "I am very concerned that the Fed's analytical assessment that inflation is transitory, combined with its policy move toward not being pre-emptive with respect to inflation, will be to repeat the mistakes of the 1960s and 1970s" when inflation surged.
For its part, the Fed remained steadfast in its outlook. Fed Vice Chair Richard Clarida said he was "surprised" by the latest data but that officials were prepared to act when needed.
"If we saw evidence that there was a risk of a persistent upward drift in inflation expectations we would not hesitate to use our tools to offset that," he said, adding that the economy was still far from out of the woods and recovery would likely take time.
Still, Victoria Fernandez, at Crossmark Global Investment, added on Bloomberg TV: "The concern is that the markets have lost a little bit of confidence that the Fed has control of inflation; I don't think it's necessarily the level, I think it's the concern over 'is the Fed going to wait too long to address the inflation question'.
"I am not sure the market is extremely comfortable with that at this point."
All Asian markets were deep in the red, with Tokyo losing more than two percent and Hong Kong - where monetary policy is linked to the US via a currency peg - was off more than one percent.
Seoul, Wellington and tech-rich Taipei - which has also been rocked by the imposition of new virus measures - were all down more than one percent, while Sydney, Shanghai and Bangkok also suffered big losses.
London, Paris and Frankfurt all fell more than one percent after the open.
And the dollar held Wednesday's healthy gains that came on the back of bets that US borrowing costs could rise sooner than anticipated.
But Tai Hui, at JP Morgan Asset Management, remained broadly upbeat about the outlook for equities, saying that while the sell-off on Wall Street was heavy, the gain in Treasury yields - a gauge of future interest rates - was less severe.
"The market's reaction in terms of inflation expectations was also mild, reflecting the belief that this jump in inflation will eventually calm and revert closer to the Fed's long-term target," he said in a note.
"Hence, the Fed's insistence that inflation is only transitory does have an audience. But if inflation data does not calm in the next few months, the challenge to its credibility could be disruptive."
Bitcoin clawed back some of the big losses it suffered late Wednesday in reaction to news that Tesla had stopped allowing people to pay for its cars with the cryptocurrency citing the environmental impact caused by the computing-intense mining process of creating new units.
It fell about 16% to around $46 045 after Tesla boss Elon Musk's comments before it later bounced to sit at $51 250 in Asia trade.