Morning commuters cross a street outside Tokyo Station in Tokyo, Japan, on Monday, 21 August 2023. (Photo: Shoko Takayasu/Bloomberg) Risk appetite returned as US inflation data for August supported bets for a Federal Reserve rate cut next week. Benchmarks in Japan, South Korea and Taiwan advanced, pushing the MSCI Asia-Pacific Index to the biggest gain in almost a month.
“The tech rebound and increased appetite for risk-taking are enjoyed by the Asian markets as well,” said Jun Rong Yeap, market strategist at IG Asia. “Rate expectations are still split on what will come beyond September, so that may still see some caution creeping back in as the Fed meeting nears,” he said.
Markets have been grappling with the size of the Fed’s potential rate cut, as well as the health of the rally in artificial-intelligence stocks, for months. AI bellwether Nvidia Corp. rose 8.2% in US trading on Wednesday, helping the S&P 500 overcome an early decline and boosting sentiment about the sector that spread into Asia. Taiwan Semiconductor Manufacturing Co. was among top gainers on the regional stocks index.
In Japan, the Nikkei index halted a seven-day losing streak as the US inflation print pulled the yen down from its strongest level against the dollar since December. A region-wide gauge of tech stocks rose more than 2% after Nvidia Corp. jumped 8.2% overnight. Chinese stocks were mixed in early trading.
The so-called core consumer price index — which excludes food and energy costs — increased 0.3% from July, the most in four months, and 3.2% from a year ago, Bureau of Labor Statistics figures showed on Wednesday. The three-month annualised rate advanced 2.1%, picking up from 1.6% in July, according to Bloomberg calculations.
“This isn’t the CPI report the market wanted to see,” said Seema Shah at Principal Asset Management. “The number is certainly not an obstacle to policy action next week, but the hawks on the committee will likely seize on today’s CPI report as evidence that the last mile of inflation needs to be handled with care and caution.”
An index of the dollar was steady after falling on Wednesday. Oil held gains from Wednesday as Hurricane Francine ripped through key oil-producing zones in the US Gulf of Mexico, prompting traders to cover bearish bets.
Bank of Japan policy board member Naoki Tamura sent the yen slightly upward with comments about lifting its benchmark rate to at least 1% by the end of its projection period. On Wednesday, another board member, Junko Nakagawa, said the central bank will continue to adjust policy provided the economy performs in line with projections in comments that sent the yen higher.
Japan’s producer price index rose less than expected in August. Other data set for release in Asia includes producer prices for Hong Kong, inflation and industrial production in India and a rate decision in Pakistan. Investors are also showing new interest in Southeast Asian equities, which have emerged as a favoured trade among fund managers for the Fed’s policy pivot.
US rates
Whether the economy is entering a soft landing that only requires a series of modest rate cuts, or heading for a harder landing at some stage in the next year is the biggest conundrum for investors. Currently, Fed swaps are pricing in over 140 basis points of rate cuts by the Jan. 29 rate decision, equivalent to roughly two half-point moves over the next four gatherings barring no intra-meeting event.
“The firmer-than-expected core inflation print will make it harder for Jerome Powell to deliver a 50 basis-point cut in September,” said Krishna Guha at Evercore. “We continue to think a starter 50 basis-point cut is the right play and might even now win out. But the odds have moved against this, and risks to markets and the soft landing are higher as a result.”
Guha noted that if the Fed doesn’t cut rates by 50 basis points next week, it will possibly do that in November.
Treasuries were steady, with the 10-year yield at 3.67% on Wednesday. Australian and New Zealand yields were slightly higher.
In corporate news, OpenAI is in talks to raise $6.5-billion from investors at a valuation of $150 billion, according to people familiar with the situation. Nvidia Corp. CEO Jensen Huang said the limited supply of their products has frustrated some customers and raised tensions.
Alimentation Couche-Tard Inc. is discussing improving its takeover proposal for Seven & i Holdings Co. with the goal of convincing the Japanese convenience store operator to start engaging in discussions, people with knowledge of the matter said.