Asian stocks were set to advance on Thursday, following the US stock market’s rally, which reached new heights ahead of the release of crucial inflation data. This data, expected to shed light on inflation trends, could play a defining role in shaping the Federal Reserve’s approach to monetary easing over the coming months. Strong performances across various sectors, including technology, bolstered optimism, though China’s market struggles continued to weigh on regional sentiment.
Shares in Australia and equity futures in Japan opened higher, benefitting from the weakening yen, which made Japanese exports more competitive. Hong Kong’s stocks also showed signs of life, though volatility remained elevated. The yen slumped to its lowest level since mid-August, trading near 149 per US dollar, providing support for Japanese equities that rely heavily on overseas sales.
However, despite the positivity elsewhere in Asia, Chinese markets faced a challenging environment. An index tracking US-listed Chinese companies experienced a notable drop in New York, which followed a sharp decline in China’s benchmark index — the biggest in more than four years. The underperformance of Chinese equities highlights concerns about the country’s economic outlook, especially given the lack of robust support measures from Beijing to address the ongoing economic slowdown.
One of the key questions on investors’ minds is whether China will implement additional fiscal stimulus to reinvigorate its sluggish economy. On Wednesday, Chinese authorities announced plans for a press conference over the weekend, with speculation swirling that fiscal measures could be unveiled. However, the absence of concrete details so far has left the market uncertain, keeping volatility elevated, particularly in Hong Kong, where a key volatility index remained above historical averages despite a slight dip on Wednesday.
China’s slowdown has been a major cause for concern among global investors, and the lack of clear policy support has left its equity markets vulnerable to further gyrations. Any significant policy announcements this weekend could have a ripple effect on markets both in Asia and globally.
The S&P 500 index rose by 0.7% on Wednesday, setting its 44th record high of the year, driven primarily by gains in the technology sector. Apple Inc. surged 1.7%, continuing its positive momentum, while Nvidia Corp. ended a five-day winning streak, and Tesla Inc. dipped slightly ahead of the anticipated launch of its Robotaxi service. Alphabet Inc., on the other hand, faced pressure, falling 1.5% amid reports that the US government was contemplating a potential breakup of Google as part of a landmark antitrust case targeting big tech companies.
According to Solita Marcelli, chief investment officer for the Americas at UBS Global Wealth Management, the tech sector’s recent rally reflects prior periods of weakness, which offered attractive buying opportunities. “We remain positive on the tech sector as well as the outlook for artificial intelligence,” Marcelli said. “We believe volatility should be utilized to build long-term AI exposure.”
Investors are now eagerly awaiting the release of US consumer price index (CPI) data, scheduled for later on Thursday. The report is expected to show that inflation is continuing to moderate, which would provide further justification for the Federal Reserve to continue easing monetary policy in the coming months. The CPI is forecasted to increase by just 0.1% in September, marking its smallest gain in three months. On an annual basis, the index is projected to have risen by 2.3%, marking the sixth consecutive slowdown in inflation growth and the lowest rate since early 2021.
Crucially, the core CPI, which excludes volatile food and energy prices and provides a clearer picture of underlying inflation trends, is expected to rise by 0.2% month-over-month and 3.2% year-over-year.
While the latest inflation data is expected to reinforce the view that inflationary pressures are cooling, it comes on the heels of last Friday’s surprisingly strong US jobs report, which has led many investors to dial back their expectations of aggressive rate cuts by the Federal Reserve.
As of Wednesday, market pricing indicated that the likelihood of another 50 basis point rate cut was all but off the table, as stronger-than-expected job growth suggested that the economy remained resilient, reducing the immediate need for further easing.
Minutes from the Federal Reserve’s September meeting, released on Wednesday, showed a mixed picture of sentiment among policymakers. While Federal Reserve Chair Jerome Powell received pushback from some officials regarding the scale of potential rate cuts, the minutes revealed broad consensus that inflation was fading and that the US labor market could experience some weakness.
David Russell, vice president of market intelligence at TradeStation, noted that the minutes keep the possibility of future rate cuts alive, depending on economic conditions. “Policymakers agree inflation is fading, and they see potential weakness in job growth,” he said. “That keeps rate cuts on the table if needed. The bottom line is that Powell might have the market’s back headed into the year-end.”
This sentiment could provide further support for markets, as investors grow increasingly confident that the Federal Reserve will remain responsive to signs of economic weakness or financial instability.
The yield on 10-year US Treasuries rose by six basis points on Wednesday to 4.07%, reflecting investor caution ahead of Thursday’s CPI data. Higher bond yields can often signal expectations of rising inflation or interest rates, though in this case, the move may have been driven by traders adjusting their positions in response to last week’s strong labor market data.
Meanwhile, the Bloomberg Dollar Spot Index held steady on Thursday after rising by 0.4% during the previous session. The dollar has now climbed for eight consecutive sessions, buoyed by safe-haven demand and higher bond yields, which make dollar-denominated assets more attractive to global investors.
The Japanese yen, which has been under pressure for much of the year, showed little change against the dollar on Thursday, remaining near 149 per dollar — its weakest level since mid-August. A weak yen can benefit Japan’s export-heavy economy by making its goods more competitive in global markets, but it also raises the cost of imports, particularly energy, which could have inflationary consequences.
Looking ahead, investors will continue to monitor Thursday’s CPI data for clues about the future trajectory of inflation and interest rates. Although the Federal Reserve appears to be shifting its focus away from inflation and towards the labor market, as noted by Matthew Weller, global head of research at Forex.com and City Index, inflation data can still be a significant driver of market volatility.
“Despite that logical observation, this month’s CPI report may still drive market volatility, coming on the back of Friday’s stellar jobs report,” Weller said, adding that the data could reignite concerns about potential upside risks to inflation.
Meanwhile, Mary Daly, president of the San Francisco Federal Reserve, said on Wednesday that she expects the central bank to continue cutting interest rates this year to support the labor market. Daly suggested that one or two more quarter-point reductions were likely, signaling that the Fed remains cautious about tightening financial conditions too quickly.
In the commodities market, oil prices held steady on Thursday, with traders weighing the impact of swelling US crude inventories against broader market uncertainties, including China’s fiscal policy plans. The oil market has been caught in a balancing act between concerns about slowing global demand, particularly from China, and potential supply disruptions.
Meanwhile, gold prices remained little changed after falling for six consecutive sessions. The precious metal has faced downward pressure as rising bond yields and a stronger US dollar have reduced its appeal as a safe-haven asset. Investors will be watching the CPI data closely, as any signs of weakening inflation could provide support for gold prices by reducing the likelihood of further interest rate hikes.
