Rumors of central bank tightening in Japan and China, which were underscored by stronger-than-expected data, caused Asian stock markets to trade lower last night. Chinese real GDP growth strengthened from a year-over-year rate of 10.4% in the fourth quarter to 11.1% in the first quarter, and Chinese CPI inflation in March rose to 3.3%, the highest rate in two years. In Japan, an index that measures activity in the service sector was stronger than expected in February, although January's outturn, which originally had been very strong, was revised lower. The Shanghai stock market fell 4.5% last night, its biggest decline since the 9% drop in late February, and the Nikkei index was off 1.7%. Most European bourses are down about 1% as of this writing, and futures prices suggest that the U.S. stock will open lower later this morning.

These risks shocks are having predictable effects on currency markets. Namely, some yen carry trades, which are risky trades, are being unwound. Therefore, the Japanese yen has strengthened versus most major currencies, including the U.S. dollar. The U.S. dollar is mixed versus most other currencies. The Canadian dollar strengthened this morning after Canadian CPI inflation data for March came out much higher than expected. Hopes for rate cuts by the Bank of Canada, which had been fading anyway over the past few weeks, were quickly blown away by the higher-than-expected inflation data this morning. Indeed, some market participants may start to expect further rate hikes. The Canadian dollar has risen this morning to a 6-month high versus its U.S. counterpart.

Attention now turns to this morning's U.S. economic data releases, which include the weekly series on initial jobless claims and the Philly Fed index of manufacturing activity. Weaker-than-expected data are sure to rattle markets further and would likely lead to dollar depreciation. However, the greenback could recoup some of its recent losses if the data print stronger than most market participants expect.