Stella Qiu, Alun John

HONG KONG, (Reuters) – Asian shares markets dropped on Friday after U.S. inflation data that was hot and hawkish remarks from a Federal Reserve official fueled bets about higher U.S. rates and sent U.S. Treasury yields soaring.

MSCI’s Asia-Pacific broadest index outside Japan fell 0.76%. However, most markets were in red. A resurgence of property stocks has helped China markets. Japanese markets were closed during the holiday.

The index that monitors Hong Kong’s listed property firms increased by 2% while the one that tracks Chinese real estate onshore gained 1%. It was triggered by media reports that China is allowing real estate firms to have easier access presale proceeds from residential developments.

U.S. data from Thursday showed that consumer prices rose 7.5% in December on a year over year basis. This was higher than economists had predicted at 7.3%. It also marked the largest annual inflation increase since 1940.

After James Bullard of the St. Louis Federal Reserve Bank stated that data has made him “dramatically more hawkish”, sentiments deteriorated even further. Bullard is a member voting on the Fed’s rate-setting panel this year. He stated that he wanted to see a complete percentage point in interest rate increases by July 1.

Although Bullard is a more conservative Fed policymaker, the CME Group (NASDAQ) contracts priced at 88% and 95% respectively for a March 50 basis point increase, as well as a June 100 basis point chance, are significantly higher than the prior data.

The U.S. Markets overnight sold more aggressively than the Asian ones on Friday morning. They tumbled by 1.47%, lost 1.81%, and dropped 2.1%. [.N]

E-mini futures for the S&P 500 were 0.46% lower in early Asian trading.

“Our view is that Asian shares were not as relatively overvalued as US equities so there should be some selective resilience,” said Lorraine Tan, Morningstar’s Director of Equity Research in Asia, while adding that the market was still digesting a higher cost of capital than it had been used to.

We believe the market has already accounted for a rise of 10-year Treasury yields to 2.0-2.5%. If yields rise above that level, there is risk and fear.

For the first time in August 2019, benchmark yields reached 2%. It was at 2.0329% when it last occurred.

After the CPI data, two-year notes that are usually in line with expectations of interest rates rose sharply to yield 1.5643%.

Matt Simpson, City Index Senior Market Analyst said, “This reaction is very significant considering traders were supposedly expecting to see a 50 year high on CPI.”Simpson stated that inflation rose by 2.1 percent in the last four months, which is a positive sign for the Fed. Simpson noted that the U.S. central banks was not referring to the inflation rise as a temporary stage.

This spike caused significant volatility in the currency markets, sending Thursday’s dollar to an all-time high of $55.

These movements slowed on Thursday, as traders reminded the Fed that it isn’t the only central bank tightening policies. But the dollar held its ground with the euro dropping 0.2% and New Zealand and Australian dollars falling about 0.3% each.

Oil prices fell 0.41% to $89.51 per barrel due to the higher dollar. The price of a barrel fell to $90.95, or 0.58%. [O/R]

It was $0.5% lower at $1824.21 an ounce. [GOL/]