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The Asia-Pacific stock markets fell sharply on Friday, driven lower by China’s weaker-than-expected inflation data for September. Markets across the region reacted negatively to the news that China’s consumer price index remained flat, falling short of analyst expectations. The data reignited concerns about China’s slowing economy and the impact on regional growth.

In early trading, China’s benchmark CSI 300 index dropped 0.83%, while Hong Kong’s Hang Seng index plunged 1.47%. Japan’s Nikkei 225 slipped 0.13%, and South Korea’s Kospi lost 0.62%. Australia’s S&P/ASX 200 was down 0.3%. The declines followed overnight losses on Wall Street after stronger U.S. inflation drove the major indexes lower.

China’s National Bureau of Statistics reported consumer prices were unchanged in September versus forecasts for a 0.2% increase. The producer price index fell 2.5% from a year ago, compared to estimates for a 2.4% decline. The weak inflation numbers underscore the challenges facing China’s economy as it emerges from stringent zero-COVID policies.

ANZ economist Raymond Yeung stated, “The PPI remaining in contraction underscores weak domestic demand, while the CPI print highlights the soft consumption recovery.” The tepid inflation highlights what Chinese leaders described as a “tortuous” path to economic normalization post-pandemic.

In reaction to the data, the Shanghai Composite slipped 0.64%, extending losses after opening lower. Hong Kong’s Hang Seng dove over 2%, dragged down by property developers and technology companies. Tencent and Meituan each dropped over 3% in morning trade.

Chris Weston, head of research at Pepperstone Group, said “The China CPI missing estimates and falling into deflation has ramifications for global inflation and has hit risky assets in Asia.”

The weak China data drove broad declines across the region’s equity markets. In Japan, the Nikkei 225 fell as stocks with high exposures to China, such as robotics maker Fanuc, dropped over 1%. Automakers like Toyota and Honda saw losses as supply chain disruptions may continue.

South Korea’s Kospi also headed lower, with tech heavyweights Samsung Electronics and SK Hynix contributing to the index’s slide. Australian miners declined amid growth concerns, pulling the S&P/ASX 200 into negative territory.

U.S. stocks closed sharply lower overnight after September’s consumer price index showed persistent inflationary pressures. The CPI jumped 8.2% year-over-year, dashing hopes that price increases were slowing materially. The data drove rate-sensitive tech stocks down and lifted the 10-year Treasury yield to 4%.

Sumitomo Mitsui DS Asset Management senior strategist Tomo Kinoshita said, “The U.S. CPI data highlighted the dilemma facing the Federal Reserve. Tightening monetary policy hurts growth, while easing intensifies inflation.”

The negative lead from Wall Street, coupled with China’s weak inflation data, suggests further downside for regional markets. Ongoing global recession fears, inflation concerns and geopolitical tensions continue to dampen investor sentiment.

Earlier Data Showed China’s Factory Gate Inflation Eased in September

China had reported earlier that its producer price index declined 2.5% in September from a year earlier. The drop was slightly smaller than economists’ 2.4% forecast, marking the third straight month of slowing declines in factory gate inflation.

The pullback in producer prices aligns with recent government measures to stimulate infrastructure spending and prop up the ailing property sector. However, demand remains muted amid COVID curbs and global slowdown fears. ANZ’s Yeung noted, “the PPI remaining in contraction underscores weak domestic demand.”

Singapore Keeps Monetary Policy Unchanged for Second Month

Singapore’s central bank left its exchange rate-based monetary policy unchanged at its biannual meeting, maintaining the pace of appreciation for the local dollar. The Monetary Authority of Singapore uses the exchange rate rather than interest rates to steer monetary conditions.

Core inflation in Singapore eased to 3.4% in August from 4.8% in July. The central bank expects core inflation to moderate further to 2.5–3.0% by December 2022 on slowing global inflation and domestic price pressures.

The bank said Singapore’s growth prospects remain subdued in the near term but should pick up gradually in the second half of 2024 as global conditions improve. The GDP outlook aligns with the central bank’s neutral policy stance.

Singapore GDP Beats Expectations, Expands 0.7% in Q3

Singapore’s economy grew at a faster than expected pace in Q3 2022, with GDP expanding 0.7% year-over-year according to advanced estimates. The reading exceeded forecasts for a 0.5% increase.

The construction sector powered ahead, growing 6% versus 7.7% in Q2. Both public and private sector construction output expanded robustly. However, manufacturing activity declined 5% on lower output across most industry clusters except transport engineering.

On a quarterly basis, GDP grew a seasonally adjusted 1% in Q3 following a small 0.1% rise in Q2, pointing to some growth momentum. The pickup was driven by broad-based expansions in manufacturing, finance, transportation and storage.

India’s Inflation Eases to 3-Month Low Despite Food Pressures

India’s consumer price index rose 5.62% in September from a year earlier, marking the lowest inflation since June 2022. However, the reading exceeded the central bank’s 4% medium-term target.

Food inflation, which accounts for nearly 40% of the CPI basket, accelerated to 8.6% last month from 7.6% in August. However, falling vegetable and oil prices helped offset pressures. The uneven monsoon added volatility to food costs.

Excluding food and fuel, core inflation dipped marginally to 5.9%, providing some respite. Clothing, housing and personal care costs rose less than in August.

The Reserve Bank of India has lifted its key repo rate by 190 basis points since May to contain price pressures, even as growth falters. Further hikes are likely even as inflation shows signs of peaking.

Fed Needs Core Inflation Below 4% to Pause Rate Hikes — Strategist

U.S. headline CPI inflation rose a hotter-than-expected 8.2% annually in September, driving stock markets lower. However, the data is unlikely to deter the Fed from delivering another 75 basis point rate hike in November according to Wolfe Research’s Chris Senyek.

“Our sense is that the FOMC will need to see core inflation break below 4% and believe it will continue to trend downward to pause and remain on hold for a prolonged period,” the strategist noted.

Senyek believes the cumulative impact of Fed tightening will eventually “spark economic disappointments, rising recession concerns and a downward EPS revision cycle in the months ahead.” But declining rates may be insufficient to spark a sustained rebound.

Oil Prices Rebound But Demand Worries Limit Upside

Oil prices bounced after steep losses Wednesday, with WTI recovering toward $85 per barrel. However, demand concerns kept the commodity’s gains in check.

Unexpected builds in U.S. gasoline inventories signaled weaker consumption, weighing on the energy complex along with broader economic uncertainty. Meanwhile, geopolitical tensions remain elevated after OPEC+ agreed to significant supply cuts.

“The question is what’s going to win out this year — this broader concern about the macro backdrop and potential demand softness — or questions about the security of supply,” said Helima Croft, head of global commodity strategy at RBC Capital Markets.

Asia-Pacific Markets Face Further Downside on Growth Fears

The latest inflation data from China and the U.S. dragged Asia-Pacific equities broadly lower. Markets face further volatility and potential downside as global recession risks persist.

Tighter financial conditions, inflation pressures, supply chain constraints and the property crisis in China will continue to hamper regional growth. While some central banks are ahead in policy normalization, others remain behind the curve on fighting inflation.

Investors are bracing for weaker earnings as demand softens and margin pressures weigh on corporates. Equities lack a clear catalyst for a sustained rebound as macro headwinds collide.

Conclusion:

Asia-Pacific markets retreated on Friday following China’s weaker than expected inflation data, which sparked fresh concerns about slowing growth in the world’s second-largest economy. The regional selloff followed overnight declines on Wall Street driven by persistent inflation in the U.S.

China’s tepid price pressures align with a bumpy reopening from COVID lockdowns. Meanwhile, aggressive Fed tightening fans global recession fears. With risks tilted to the downside, Asia-Pacific equities may face further volatility and weakness in coming months.

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