A wonderful Friday to you as Asian stocks climb in wild ride after CPI data. 

In brief (TL:DR) 

• U.S. stocks rose on Thursday with the Dow Jones Industrial Average (+2.83), the S&P 500 (+2.60%) and the Nasdaq Composite (+2.23%) all up although consumer price data cemented bets for the Federal Reserve to deliver another jumbo rate hike in November.

• Asian stocks advanced in the wake of a shock rebound in US stocks that roared back from losses sparked by a hot inflation reading.

• Benchmark U.S. 10-year Treasury yields fell almost three basis points to 3.91% (yields fall when bond prices rise). 

• The dollar was stable. 

• Oil was higher with November 2022 contracts for WTI Crude Oil (Nymex) (+0.35%) at US$89.42. 

• Gold was little changed with December 2022 contracts for Gold (Comex) (+0.01%) at US$1,677.10.

• Bitcoin (+3.71%) rose to US$19,809 after dipping because of the Oct. 13 Consumer Price Index Report. 

In today's issue...

1. U.S. CPI Data Proves Persistent Price Pressures Prevail

2. A Soaring Dollar is Putting Pressure on Asian Economies

3. Hackers Continue to Make Money in a Bear Market for Cryptocurrencies

Market Overview

With higher interest rates piling pressure on an already struggling global economy, the surge on Wall Street underscores the difficulties traders face in volatile markets.

Market bets on rates still lean toward back-to-back 75 basis-point hikes at the next two Fed meetings and expect the central bank to push rates past 4.85% before the tightening cycle ends.

Inflation figures in China proved relatively subdued, as a pickup in food prices countered the effects of lockdowns that are crimping economic activity.  

Asian markets rose on Friday with Tokyo's Nikkei 225 (+3.25%), Hong Kong's Hang Seng Index (+2.43%), Sydney’s ASX 200 (+1.75%) and Seoul's Kospi Index (+2.30%) all in the green.

1. U.S. CPI Data Proves Persistent Price Pressures Prevail  

• Markets swung wildly on Thursday after the hotter-than-expected inflation report cemented expectations for more “super-sized” interest rate increases from the U.S. Federal Reserve that some investors worry could destabilize the financial system.

• With investors already pricing in another “super-sized” rate hike in November, an end-of-year rally may catch many bearish bets off guard as October has traditionally marked reversals in markets which have been down for most of the year. 

The U.S. Consumer Price Index report for September, released Thursday, showed that painfully rapid price increases continued to trouble Americans and bedevil the U.S. Federal Reserve.

Despite repeated “super-sized” interest rate hikes, inflation continues to plague American consumers.  

CPI, including energy and food, climbed 8.2% in September versus the prior year, a slight moderation from 8.3% the previous month, but that was because gasoline prices had fallen, a trend that has since reversed. 

The CPI’s core measure of inflation rose 6.6% on an annual basis last month, faster than the 6.3% rate in August and its fastest pace in four decades, more than forecast.

Markets swung wildly on Thursday after the hotter-than-expected inflation report cemented expectations for more “super-sized” interest rate increases from the U.S. Federal Reserve that some investors worry could destabilize the financial system.

The S&P 500 dropped 2.4% on Thursday, setting a new low for the year, before a sharp reversal to end the day 2.6% higher. The Nasdaq Composite ended 2.2% higher, recovering from a decline of about 3.2%.

Price action was enough to give your average investor whiplash.  

The two-year U.S. Treasury yield, which is influenced by expectations for interest rates, soared by roughly 0.2% to a new high of around 4.5%, a big move for an asset that typically moves in hundredths of a percentage point.

Central bankers have raised interest rates five times this year and are expected to make a fourth jumbo sized, three-quarter-point move at their next meeting in early November, but the pace and ferocity of the reversal in markets was shocking.

Theories for the reverse range from short squeezes leading to sharp reversals and an overcrowded market for bets against the market leading to contrarian views. 

While investors and economists had been looking for signs that the Fed might start to slow the pace of interest rate hikes from the 0.75% increases it has announced at each of its past three meetings, CPI data suggests such a move is not yet on the immediate horizon. 

After the report was released, traders in the futures market priced in a 98% chance that the Fed would lift interest rates by 0.75 percentage points in November, compared with 84% on Wednesday.

But the wild swings in the stock markets and even for assets like Bitcoin have left traders scratching their heads, wondering what happens next. 

With investors already pricing in another “super-sized” rate hike in November, an end-of-year rally may catch many bearish bets off guard as October has traditionally marked reversals in markets which have been down for most of the year. 

2. A Soaring Dollar is Putting Pressure on Asian Economies

• Slower growth, rising rates and higher debt levels have led to a situation in Asia where public and private debt dynamics are already worse than immediately following the pandemic. 

• The IMF said Asia is now both the world’s largest debtor and saver and that several countries are at a high risk of debt distress. 

In the latest outlook for Asia, the International Monetary Fund has warned that the region’s economies will need to focus on fiscal stability in order to offset surging debt and to support monetary policy. 

Slower growth, rising rates and higher debt levels have led to a situation in Asia where public and private debt dynamics are already worse than immediately following the pandemic. 

A soaring dollar has hammered Asian currencies and upped the ante on dollar-denominated debt burdens. 

The IMF said Asia is now both the world’s largest debtor and saver and that several countries are at a high risk of debt distress. 

Asian governments preparing for additional spending to offset the hit from food and energy shocks will need to ensure that such packages are targeted, temporary and budget neutral, according to the IMF.

But managing relief packages could be tricky especially as many Asian countries head towards elections next year, with both India and Thailand headed to the polls in 2023, while Indonesia elects a new president in 2024.  

The warning comes as as the IMF, a lender of last resort, downgrades its 2022 growth forecast for the Asia-Pacific region by 0.9% to 4% and expects growth to be 4% in 2023, down 0.7% from an earlier forecast. 

Asia’s main challenge at the moment is the large exchange rate depreciations that are contributing to imported inflation and forcing faster monetary policy tightening in the region at a time when economies are showing signs of slowing growth. 

Nevertheless, while growth is much lower than the 5.5% average growth rate enjoyed over the previous two decades, Asia continues to perform better relative to the rest of the global economy and especially Europe, making some assets potential bargains.

3. Hackers Continue to Make Money in a Bear Market for Cryptocurrencies 

• This year has made the greatest amount on record for total value hacked with the gross tally for the year past US$3 billion.

• Cybersecurity unfortunately is often best led through centralized efforts and attempts to decentralize securing the DeFi landscape remain elusive for now. 

According to blockchain data analytics company Chainalysis, at least US$718 million has been stolen so far in October alone, taking the gross tally for the year past US$3 billion and making this year the greatest amount on record for total value hacked. 

A mountain of hacks, primarily in decentralized finance comes at a time when soaring U.S. Treasury yields has seen the “total value locked” in the sector dwindles as yields in smart contracts and liquidity pools is outshone by safer investment instruments. 

DeFi protocols which deploy software-based algorithms to enable investors to trade, borrow and lend on digital ledgers without using a central intermediary have become a favorite target for hackers as centralized exchanges have beefed up security.

Not so long ago, centralized cryptocurrency exchanges were regular victims for hacks, but stronger cybersecurity measures has dramatically lowered such incidents. 

DeFi on the other hand uses open source code, and decentralized exchanges often rely on developer communities to maintain and secure the code that allows for direct peer-to-peer transactions. 

But a lack of blockchain interoperability has meant that bridges, which allow tokens to be used across different blockchains, to become a critical point of weakness.  

Bridges, which operate on open-source code as well, are almost entirely run by communities of volunteer developers who are rewarded in native tokens for their efforts, but also present a vast attack surface area for hackers. 

Blockchain interoperability is facilitated by bridges which holding tokens from one blockchain in smart contracts and “mint” the equivalent token on a different blockchain for compatible use.

Hackers can target bridges in a variety of ways, including tricking the smart contract into believing that a token has been held in escrow when it has not been, using a re-entrancy bug, and minting “unbacked” tokens, or targeting the amounts held in escrow to begin with.  

Chainalysis claims that “October is now the biggest month” for hacking activity in 2022 with two major exploits roiling the cryptocurrency sector in recent days. 

One was a heist whereby a hacker spirited away about US$100 million from DeFi service Mango by manipulating the price of its token. 

Another was nearly US$570 million of BNB, the Binance token, that was effectively minted and taken by a hacker through a bridge exploit.

Because the hacker in the Binance incident was “minting” tokens, Binance was able to freeze most of the tokens, but US$100 million worth remains unaccounted for.  

DeFi platforms are also a prime target for state-sponsored hacking and earlier this year, Chainalysis estimated that North Korea-affiliated groups have stolen approximately US$1 billion of cryptocurrencies from DeFi protocols.

But unlike for centralized cryptocurrency exchanges, solutions for DeFi may still be some ways away. 

Whereas a centralized crypto exchange can simply take its assets off so-called “hot wallets” which care connected to the internet and store the bulk of reserves in offline “cold wallets,” the definition of DeFi is that all of the assets sit in the smart contracts themselves. 

And until alternative solutions for bridges are found, they remain a key piece of critical blockchain infrastructure that is prone to hacks and are likely to remain exploited for some time to come. 

Cybersecurity unfortunately is often best led through centralized efforts and attempts to decentralize securing the DeFi landscape remain elusive for now.