Goodbye 50, hello ... 100?

© Reuters. A person arranges groceries in El Progreso Market in the Mount Pleasant neighborhood of Washington, D.C., U.S., August 19, 2022. REUTERS/Sarah Silbiger

(Reuters) - A look at the day ahead in Asian markets from Jamie McGeever

The U.S. inflation report for August has landed, and the previously unthinkable is now a possibility: could the Fed raise rates by 100 basis points next week?

It is something that U.S. rates futures traders attached as much as a 35% probability to on Tuesday, and which rocked global markets. Economists at Nomura now have it as their base case forecast.

While U.S. inflation has probably peaked, it is stickier than policymakers had bargained for. The August figures - monthly, annual, core and headline readings - were all higher than expected.

Markets did what markets do: they overreacted. Wall Street tanked - the Nasdaq fell 5% - the dollar jumped, and the two-year bond yield surged 25 bps to a 15-year high of 3.78%. That is effectively a quarter point of policy tightening in a day.

Rates markets have kissed goodbye to a half-point hike from the Fed next week. The debate now is whether the Fed pushes back against the growing expectations for 100 bps. A glance back to June shows they have form for this.

Of course, the higher rate expectations go - the terminal rate is now around 4.30% - the greater the chance of recession. Around 50 bps of rate cuts are now priced into the 2023 curve.

While a U.S. recession would be policy induced, the looming recession in Europe will be driven by the energy price squeeze on consumers. The latest ZEW business sentiment survey on Tuesday suggests Germany may already be in recession, HSBC reckons.

That is the gloomy environment that Asia wakes up to on Wednesday. Japan's Tankan survey as well as Indian current account and inflation data could provide a distraction from the U.S. rates story, but it will likely be fleeting.

Key developments that should provide more direction to markets on Tuesday:

Japan Tankan survey (Sept)

Japan machinery orders (July)

India trade, current account (Q2)