Asian stock markets rallied on Thursday, driven by expectations of an imminent Federal Reserve interest rate cut following an as-expected U.S. consumer inflation report.
Federal Reserve Rate Cut Bets Lift Regional Equities
Asian stocks climbed after U.S. consumer inflation data cemented bets for a Federal Reserve interest-rate cut next week. The consumer price index rose 0.3 percent last month, marking its largest gain since April, but remained in line with Reuters poll forecasts. Analysts noted the inflation figure was not hot enough to derail central bank officials from normalizing policy. Satoshi Sugiyama of Reuters News noted that markets price in a 40% chance of a September Fed rate hike following mild U.S. inflation data, while money markets predict a 40% chance of a rate hike, down from 54% a week ago, according to CME Group’s FedWatch.
The market response across major indices reflected renewed risk appetite. Japan’s Nikkei topped 40,000 for the first time since mid-October, supported by chip-sector gains and a weakening yen as traders pared back expectations for an immediate Bank of Japan rate hike. MSCI’s broadest index of Asia-Pacific shares outside Japan rose 0.97%, led by South Korean shares jumping 4.4%. Japan’s Nikkei gained 1.86%, while S&P 500 E-minis were up 0.02%. The exporter-heavy Nikkei jumped 1.5 percent as of 0202 GMT, while the broader Topix climbed 1.2 percent. South Korea’s KOSPI added 0.7 percent, Taiwan’s benchmark gained 1 percent, Hong Kong’s Hang Seng advanced 0.4 percent, and mainland Chinese blue chips edged 0.2 percent higher.
With August CPI data due before next month’s Federal Open Market Committee meeting and crude oil futures rising moderately since July, both the Fed and markets will likely want to assess the data right up until just before the September FOMC,
said Den Miki, senior rate strategist at SMBC Nikko Securities, in a note.
Reflecting on market sentiment, Chris Weston, head of research at Pepperstone, observed that The US CPI print lit a flame in US equity.
Treasury Yields, Currencies, and Commodity Movements
Bond and currency markets reacted to fiscal pressures and shifting monetary policy expectations. U.S. 10-year Treasury yields rose to 4.2828 percent, hitting their highest level since November 27 amid caution over a widening U.S. budget deficit. The stronger Treasury yields helped the U.S. dollar hold firm near a two-week high. Meanwhile, the dollar strengthened in Asia on Monday because of signs that negotiations between the United States and Iran hit a stalemate, leaving the vital Strait of Hormuz virtually closed and driving oil prices higher. Against major peers, the dollar traded around 152.11 yen, slipping 0.2 percent and backing away from a two-week high hit after Bloomberg reported that Bank of Japan officials see little cost in waiting to hike rates again. Market-implied odds for a quarter-point rate increase on December 19 stood at 27 percent. Meanwhile, the euro ticked up 0.1 percent to $1.05065, and the Swiss franc eased 0.1 percent to 0.88345 against the dollar ahead of expected interest rate cuts from the European Central Bank and Swiss National Bank. Japan bet that a shift toward tighter monetary policy at the Bank of Japan and support from Scott Bessent could provide additional momentum to yen-buying intervention and help slow down the decline. Dolar benefited as a liquidity store during risk events, rising 0.3% against the Japanese yen to 157.10 yen, while the euro fell 0.28% against the dollar. Crude oil hovered near a two-and-a-half-week peak driven by the threat of additional sanctions affecting Russian output, while Washington and Tehran remained deadlocked over efforts to end the Gulf war. U.S. U.S. crude fell 0.83% to $82.58 a barrel and Brent fell to $88.35 per barrel, down 0.71% on the day. U.S. President Donald Trump on Sunday rejected Iran’s response to the U.S. proposal for peace talks to end the war, stating that Tehran’s demands were completely unacceptable.
Iran’s plan sent to the U.S. emphasized the necessity of ending the war on all fronts and lifting sanctions against Tehran, along with reparations and recognition of Iranian control over the Strait of Hormuz, according to Iranian media reports. The conflict in the Middle East is now entering its 11th week, said Bruce Kasman, global chief economist at JPMorgan. Energy prices have spiked but remain at a level that represents a drag rather than an end-of-expansion barrier. The risk of sharper moves increases every week that the Strait of Hormuz remains closed, and our commodities team expects operational pressure levels to begin around June. Iran has effectively closed the strait since the war began in late February, choking a corridor that typically carries about a fifth of the world’s oil and gas. Brent crude oil futures rapidly rose 4.5% in Asian trading to $105.87 a barrel, while U.S. crude climbed 5% to $100.24 a barrel. Talks to revive a June interim agreement made no headway and no timetable was set for its implementation, a senior Iranian source said.
Australian Employment Surge and Regional Data Divergence
The Australian dollar surged after domestic employment data topped estimates by a wide margin, rebounding from Wednesday’s weakness following a Reuters report that Beijing is considering allowing the yuan to depreciate further next year.
Because China serves as Australia’s top trading partner, the Australian dollar frequently acts as a liquid proxy for the yuan. The Chinese yuan held its ground above a one-week low after the central bank set a marginally stronger official fixing, trading up 0.2 percent at 7.2670 per dollar in offshore trading.
Market Outlook and Upcoming Decisions
Traders have priced in overwhelming odds for U.S. monetary policy action. Financial markets currently lay 97 percent odds on a quarter-point Fed cut when the Federal Open Market Committee meets on December 18. Investors will continue tracking economic data releases and central bank commentary to gauge whether global monetary easing will maintain momentum into the new year.
