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Asian shares slide after strong U.S. consumer prices figures prompt Fed rate hike expectations

Asian shares fell on Friday, on track for their largest one-day percentage decline in a week, following stronger-than-expected U.S. consumer prices figures. The data has strengthened the case for the Federal Reserve to keep interest rates higher for a longer period, dampening investor sentiment.

The MSCI’s broadest index of Asia-Pacific shares outside Japan fell by 1.2%, retracting from a three-week peak reached on Thursday. Nevertheless, it is still on track to end the week with a gain of 1.4%, ending a three-week losing streak.

The negative sentiment is expected to spill over into European markets, with futures for the Eurostoxx 50, the German DAX, and the FTSE all showing declines.

Investors will be closely watching inflation reports from Sweden, Spain, and France later in the day, which will provide further insight into global economic trends.

The unexpected surge in U.S. consumer prices for September, particularly in rental costs, has increased the likelihood of another rate hike by the Federal Reserve this year. Futures contracts indicate a 40% probability of a rate hike in December, up from 28% before the release of the CPI report.

This data poses a challenge for the Federal Reserve, as it strives to bring inflation down to its target of 2%. It also comes alongside other data showing an increase in the number of Americans receiving benefits, indicating a softening labor market.

The rise in Treasury yields on Thursday, driven by the inflation report and weak demand for U.S. 30-year bonds, reversed recent gains in stocks and a decline in yields. The yield on 10-year Treasury notes was down 4.1 basis points at 4.670%, but still far from the two-week low reached on the previous day.

Market analysts point out that the recent “good” performance in stock markets and the flattening of the U.S. yield curve has been dampened by the latest U.S. CPI report.

China’s economic indicators also contributed to the gloomy sentiment, with consumer prices remaining flat in September and factory-gate prices shrinking at a slower pace. However, there are signs of a gradual stabilization in the world’s second-largest economy, as exports and imports posted slower declines for the second consecutive month in September.

Amidst the Middle East tensions, investors are cautious, which further weighs on market sentiment. They will now be focusing on upcoming remarks by Federal Reserve Chair Jerome Powell before the central bank’s blackout period begins ahead of its next interest-rate decision.

The overall risk-off sentiment has also affected currency markets, with the dollar holding on to its overnight gains. Gold prices inched up but remained below the two-week highs achieved in the previous session. Oil prices rose after the U.S. tightened its sanctions against Russian crude exports, creating concerns about supply in an already tight market.

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