Tom Westbrook

SINGAPORE, (Reuters) – Tech shares fell and short-term Treasury yields rose on Tuesday. Investors expect inflation to trigger interest rate rises. The latest indication of rising prices is a warmer-than-forecast reading from Australia.

Short-dated bonds and government bonds were also sold after the release of data, showing that Australian core inflation hit a six year high.

MSCI’s Asia-Pacific broadest index fell 0.5%. However, it continues to be on pace for its best monthly performance of the year, aided by falling tech shares in Hong Kong. It fell by 0.6%

Wall Street indexes had previously set new records, and U.S. stock markets were flat early in trade due to strong earnings.

Khoon Goh (head of Asia research, ANZ Bank Singapore) stated that “there are a few things that concern investors, and inflation news is everywhere.”

The expectation of the Fed raising interest rates soon is beginning to be a focus. Markets have moved beyond tapering to focus on tightening and the announcement of tapering is almost a done deal.

The two-year U.S. Treasury yields jumped nearly five basis points to 0.4970%, an 19-month record. With crude oil prices and soft commodities hovering at multi-year highs, the Federal Reserve will meet next Tuesday and Wednesday. [O/R][GRA/]

While the Fed appears to have confirmed that they will be cutting back on their asset purchases shortly, it has not indicated that rate rises are likely. Fed funds futures have been priced to see a rise in interest rates during the second half next year.

Analysts at NatWest stated in a note that they had updated their Fed Call to reflect a Q4 hike 2022 and four hikes 2023.

The Fed has not been able to stop the persistent inflation spike, they stated. “There’s only so much that the Fed will tolerate before it reacts… It seems inevitable that we’ll be having that conversation more often as we enter next year.”

Prior to the Fed meeting, the European Central Bank (Board of Japan), Bank of Canada and Bank of Japan established policy. Tokyo is not expected to make any changes, however traders expect the ECB will push back against market inflation forecasts. They are also looking for hawkish clues coming from the Bank of Canada because rates are under pressure from rising prices.

PRICE SUMMARY: PRICES UP, LOWER

Australia’s surprise rise in consumer prices has encouraged bond traders to bet aggressively that the Reserve Bank of Australia would change its dovish outlook.

This print comes after a New Zealand-decade high inflation reading last week. It has hit bond markets hard and pushed forward rates hike expectations to mid-2022.

In direct opposition to RBA’s plans, 0.1% yield was set for Australia’s April 2023 Government Bond. This is a sign that cash rates will drop to record levels in the coming years.

The three-year Australian government bond futures (which are more traded than cash bonds) plunged 19 basis points to the lowest level since mid-2018. [AUD/]

Although the Australian dollar rose $0.7536 to $0.7536 wider currency markets were still quiet. This is because traders are looking to the central bank meetings in the coming week for direction. Canadian Dollar hovered at a level that was just below its four-month high last week.

Oil prices fell from overnight highs, with oil futures falling 0.75% to $85.75 per barrel and dropping by the same amount to $84.02 per barrel.

The gold price was steady at $1.788 per ounce, while bitcoin was at $60,000 following a session-end drop Tuesday.