Shares drop as stubborn U.S. inflation stokes worries on rates, economy

Stocks fell and the dollar held firm on Thursday as data showed U.S. inflation persistently high, and investors worried about the economic toll of aggressive interest rate hikes to tame it.

U.S. markets whipsawed after the news, then closed sharply lower. S&P 500 futures rose 0.5% in a bumpy Asia session. Foreign exchange trade was also volatile, but has left the dollar index within a whisker of a two-decade high.

MSCI`s broadest index of Asia-Pacific shares outside Japan fell 1%. Japan`s Nikkei fell 1%.

Bitcoin was pinned below $30,000 on Thursday, nursing loses from an almost 27% wipeout that has taken $11,000 off its price in about a week.

Headline U.S. consumer prices rose 8.3% for the 12 months to April. That was slower than the 8.5% pace of a month earlier and raised hopes that the pace of price rises has peaked. However, it was also higher than market forecasts for 8.1%, and reaffirmed concerns that rates will need to rise quickly to tame it.

"We`re now very much embedded with at least two further hikes of 50 basis points on the agenda. For equity markets that really is the end of free money," said Damian Rooney, director of institutional sales at brokerage Argonaut in Perth.

"I think we probably were delusional six months ago with the rise of U.S. equities on hopes and prayers and the madness of the meme stocks, and suddenly were going a little bit back to what is reality," he said.

Apple shares fell 5% overnight, dragging the S&P 500 down 1.65% and the Nasdaq down 3.2%.

Short-dated Treasuries were dumped in the wake of the data, but the longer end of the curve rallied as investors worried steep rate hikes would slam the brakes on growth.

The benchmark 10-year Treasury yield fell six basis points (bps) overnight and dropped a further four bps in Tokyo trade to 2.8877%. The gap between two-year and 10-year yields narrowed, flattening the yield curve.

"There should be a tipping point in how far the Fed can be pressed before odds clearly point towards a hard landing," said NatWest Markets` U.S. rates strategist Jan Nevruzi.

SELL IN MAY

The Nasdaq is down nearly 8% in May so far and more than 25% this year, bearing the brunt of selling as higher U.S. yields draw money out of expensively priced tech stocks.

Cryptocurrency markets are also melting down, with the collapse of the so-called stablecoin TerraUSD highlighting the turmoil.

A weakening growth picture outside the United States too is battering investor confidence, as war in Ukraine threatens an energy crisis in Europe and lengthening lockdowns in China throw another spanner into supply chain chaos.

Property developer Sunac China said it missed a bond interest payment and will miss more as China`s real estate sector remains in the grip of a credit crunch.

The uncertainty about nearly everything except U.S. rate rises has benefited the dollar. It held the euro near recent lows at $1.0524 on Thursday and hovered around 129.78 yen, while trade-sensitive currencies were squeezed.

The Australian dollar was volatile in the wake of the U.S. inflation data, but was unable to hold its ground above $0.70 and last bought $0.6943.

Sterling was at a two-year low of $1.2230 as a stand-off over post-Brexit trade rules for Northern Ireland deepens.

The Hong Kong Monetary Authority spent $202 million on Thursday to support the Hong Kong dollar which hit the weaker end of its peg to the greenback.

In commodity trade, oil steadied after a Wednesday surge amid concerns about westbound gas flows from Russia to Europe.

Brent crude futures edged 0.7% lower to $106.78 a barrel and U.S. crude was 0.6% lower at $105.07 a barrel.

British activity and growth data is due later in the day.