Asian markets extend gains as US inflation data boost rate hopes

Oil prices are being supported by worries about the Middle East crisis, though the gains have been tempered by healthy output from key producers – Copyright Getty Images North America/AFP DAVID MCNEW

Equities marched higher Wednesday after hopes for a Federal Reserve interest rate cut next month were boosted by data showing US wholesale prices rose less than forecast last month.

However, Tokyo went into retreat after news that the Japanese prime minister would not seek re-election as his party’s leader next month, bringing an end to his premiership.

The producer price index (PPI) report helped traders put last Monday’s painful rout behind them and put the focus on consumer inflation figures due later in the day, and retail sales on Thursday.

Last week’s sell-off came on the back of a big miss on US jobs creation, which stoked worries that the world’s top economy was heading for a recession, but a strong read on the services sector and unemployment benefits provided some much-needed reassurance.

The PPI figures showing factory-gate inflation heading closer to the Fed’s two percent target added to the improved mood as it suggested the central bank was on course to deliver an economic “soft landing”.

Monetary policymakers are tipped to cut rates 25 basis points at their September meeting — with some observers eyeing 50 basis points — followed by at least one more before December.

“With the prospects of an imminent Fed easing cycle, key US data releases are taking centre stage and ahead of the US CPI release… a softer-than-expected US PPI for July was treated as welcome news by the market,” said Rodrigo Catril at National Australia Bank.

“Importantly too, the items that feed into the Fed’s preferred inflation measure (core personal consumption expenditure), such as physician care costs, hospital outpatient care and airfares were flat to lower.”

Still, Atlanta Fed chief Raphael Bostic warned that he still wanted to see more positive data to be confident he could agree to a cut — but added he would likely be ready “by the end of the year”.

Wall Street ended sharply higher, with the Nasdaq jumping more than two percent on a rally in tech titans including Amazon, Nvidia and Apple, which sank earlier this month on worries their surge this year may have been overdone.

And Asia picked up the baton Wednesday.

Hong Kong, Sydney, Seoul, Singapore, Wellington, Taipei and Manila also advanced.

But Tokyo, which rose more than three percent Tuesday, reversed early gains following reports that Prime Minister Fumio Kishida intended to drop out of the race to remain party leader, bringing the curtain down on his nearly three years as the country’s leader.

He later confirmed the news, which could spark the possibility of fresh uncertainty in the country.

Shanghai also dipped.

“Despite a brief dance with recession fears last week, core optimism remains resilient due to a better-than-even chance the Fed delivers a 50-basis-point cut in September,” said Stephen Innes in his Dark Side Of The Boom newsletter.

“The markets have rebounded nicely from the recent volatility storm, with each day shedding more light on the likely causes. Once you pinpoint the cause, the element of surprise fades away, as does volatility.

“The upheaval appears to be more about the unwinding of hefty leveraged positions than any genuine concerns of an impending recession.”

While last week’s ructions were largely blamed on US recession worries, analysts pointed out that a lot of selling also came from investors rushing to unwind so-called yen carry-trades in which they take advantage of the weaker yen to buy higher-yielding assets such as equities.

That came after the Bank of Japan hiked interest rates and the Fed indicated it would soon begin cutting.

Oil prices edged up after losing around two percent Tuesday, even as tensions continue to rise in the Middle East on fears Iran will retaliate against Israel after top leaders of Hezbollah and Hamas were assassinated in Tehran in late July.

However, President Joe Biden said Tuesday that a ceasefire deal in Gaza could deter Iran from launching an attack. 

Luca Santos, at ACY Securities, said there were several reasons for the stability in crude.

He pointed to increased supplies as top producers keep output consistent, the United States tapping its strategic reserves and hopes that a full-blown conflict can be avoided.

But he warned: “The situation remains unpredictable. Any significant escalation could shake up oil supplies, leading to sharp price hikes and a return of risk-averse behaviour in the markets.”

– Key figures around 0230 GMT –

Tokyo – Nikkei 225: DOWN 0.2 percent at 36,155.26 (break)

Hong Kong – Hang Seng Index: UP 0.2 percent at 17,203.15

Shanghai – Composite: DOWN 0.3 percent at 2,858.95

Euro/dollar: DOWN at $1.0993 from $1.0998 on Tuesday

Pound/dollar: DOWN at $1.2865 from $1.2867

Dollar/yen: DOWN at 146.44 yen from 146.80 yen

Euro/pound: DOWN at 85.44 pence from 85.46 pence

West Texas Intermediate: UP 0.8 percent at $78.96 per barrel

Brent North Sea Crude: UP 0.7 percent at $81.24 per barrel

New York – Dow: UP 1.0 percent at 39,765.64 points (close)

London – FTSE 100: UP 0.3 percent at 8,235.23 (close)