A tense and watchful calm has descended upon Asian markets, as a surprise drop in US producer prices rolls out the red carpet for a Federal Reserve rate cut, but the real, high-stakes verdict on inflation is still to come.
The market is caught in a state of suspended animation, with a rally in some of the region’s tech giants providing a fragile floor of optimism ahead of a make-or-break report that could determine the course of the global economy.
Asian equities were steady on Thursday, with major benchmarks in Japan, South Korea, and mainland China all posting gains, while Hong Kong and Australia fell. The muted but broadly positive tone comes after the S&P 500 set a fresh record high in the US on Wednesday.
A dovish surprise, a hawkish debate
The market’s mood was significantly brightened by an unexpected decline in US producer prices, which fell for the first time in four months in August. The data soothed fears that runaway inflation would tie the Fed’s hands and has supercharged bets on a September rate cut.
But the dovish surprise has also ignited a new and more aggressive debate.
“Investors are now contemplating the extent to which August’s payrolls, the benchmark revisions, and PPI should drive a conversation about a 50 basis-point cut next week,” said Ian Lyngen and Vail Hartman at BMO Capital Markets.
While most, including BMO, are still in the 25-basis-point camp, the case for a more aggressive move is growing.
“The Fed should cut 50 basis points next week — but I don’t think they will,” said Neil Dutta at Renaissance Macro Research. “The doves on the FOMC have a very strong case to make.”
The final verdict: A CPI showdown awaits
The answer to this high-stakes question will arrive later today, with the release of the all-important US consumer price index (CPI). A weaker-than-expected reading could unleash the doves and send markets soaring.
“Tomorrow’s CPI will carry more weight, but today’s PPI print essentially rolled out the red carpet for a Fed rate cut next week,” said Chris Larkin at E*Trade from Morgan Stanley.
A region of contrasts
This global drama is playing out against a complex regional backdrop. In Japan, the tech giant Softbank Group is soaring, with its shares rising around 8 percent to a new high after a rally in its key holding, Arm Holdings.
In China, however, the tech behemoth Alibaba has retreated 1.3 percent as it seeks to raise 3.17 billion dollars in what would be the year’s biggest convertible note offering.
Meanwhile, a potential diplomatic thaw is emerging between the US and India, with President Donald Trump and Prime Minister Narendra Modi pledging to resume trade negotiations after weeks of a blistering fight over tariffs.
A nuted start on Dalal Street
This mixed and uncertain picture is set to be reflected on Dalal Street. The Indian stock market is poised for a mildly higher but muted start to the session.
At 9:30 am IST, the Sensex had opened 77.05 points (0.095 percent) higher at 81,502.20, while the Nifty had gained just 9.35 points (0.037 percent).
The cautious open comes after a strong previous session that saw the market end higher, with the Nifty 50 closing just shy of the 25,000 mark. Now, like the rest of the world, India waits for the verdict from America.
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