Asian markets trended upward this Monday, buoyed by a significant cooling in market expectations for a September US interest rate hike, as investors look toward Wednesday’s critical inflation report to sustain the current global rally.
Market Momentum and the September Fed Outlook
Japan’s Nikkei and South Korea’s KOSPI recorded marginal gains to start the week, while the MSCI Asia-Pacific index also climbed. This positive sentiment mirrors Wall Street’s performance from Friday, which saw the S&P 500 achieve a new record high.
The primary catalyst for this shift is the recalibration of Federal Reserve expectations. Futures markets now indicate a 44% probability of a September rate hike, a notable decline from the 67% chance seen just one week ago. This shift followed a softer-than-expected US jobs report, which suppressed Treasury yields and revitalized global risk appetite.
The CPI Deadline: What Analysts Are Watching
All eyes are now on Wednesday’s Consumer Price Index (CPI) report for July. Analysts anticipate a 0.1% increase in headline inflation, with core inflation—excluding volatile food and energy prices—expected to rise by 0.2%.
JPMorgan chief US economist Michael Feroli noted that while a core CPI print of 0.22% likely won’t trigger a September hike, consistent readings near 0.3% could force the Fed’s hand. Feroli specifically highlighted a potential rebound in core goods prices as a key factor to monitor.
Crypto and Global Risk Sensitivity
The stakes for Wednesday’s data are particularly high for cryptocurrency markets, where Bitcoin and other digital assets remain sensitive to shifts in interest rate expectations. With hike probabilities having previously reached 66% earlier this year before retreating, Wednesday’s data could trigger significant volatility in risk-on assets.
Oil Prices and Inflationary Pressures
A complicating factor for the inflation outlook is the recent rise in oil prices. Brent crude increased by 0.9% to $84.32 a barrel, while US crude rose 0.7% to $78.74. This follows reports from Iran regarding shipping lanes through the Strait of Hormuz, a vital global oil chokepoint where traffic remains minimal.
Because sustained oil price pressure directly impacts headline inflation, a “hot” CPI print on Wednesday could quickly reignite speculation regarding further rate hikes, potentially stalling the current market rally.
Currency Shifts and Earnings Performance
As rate hike fears subside, the US dollar has weakened, pushing the euro toward a seven-week high of $1.1557. Gold remains stable at $4,342 an ounce after a strong 7% gain last week.
Despite the macro uncertainty, the corporate backdrop remains robust. With nearly 90% of S&P 500 companies having reported earnings, Bank of America data reveals a 30% year-on-year increase in earnings per share. Notably, AI-related stocks have significantly outperformed, posting median growth of 28% compared to 12% for the remainder of the index. Whether this momentum persists now depends entirely on Wednesday’s economic data.
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