Fed pivot reality check for emerging markets?

Oct 12 – A look at the day ahead in Asian markets from Jamie McGeever, financial markets columnist.

Unexpectedly high US producer price inflation figures on Wednesday could cool this week’s rally in emerging market and Asian stocks, with local attention on Thursday turning to Indian consumer inflation.

Indian CPI for September tops the regional calendar, which also includes Indian trade data, bank lending, corporate goods inflation and machinery orders form Japan, and the latest snapshot of industrial production from Malaysia.

On the corporate front Fast Retailing – the Japanese operator of global clothing chain Uniqlo – is expected to report a full-year profit of 374.6 billion yen USD 2.52 billion, which would be a new record.

But the tone of trading across Asian markets on Thursday may be a little more cautious than some of the headline moves on Wednesday indicate, and may also hinge on the US yield curve.

Emerging market stocks on Wednesday had their best day since July 25 and the MSCI Asia ex-Japan index rose over 1% for its best day in more than a month.

Most of these gains were fueled by a powerful short-covering rally in U.S. Treasuries that triggered a sizeable decline in government bond yields around the world, especially at the back end of the curve.

But ugly US producer inflation data at the US open on Wednesday – monthly, annual, headline and core readings were all higher than expected – was a reality check for those betting the Fed is all but done raising rates.

The US yield curve flattened more on Wednesday than any single day since March 16, but for ‘good’ and ‘bad’ reasons.

The initial ‘bull’ flattening in Asia and Europe, led by strong buying of long-dated bonds, that pushed long yields sharply lower, flipped after the US PPI data to ‘bear’ flattening, led by selling of two-year bonds and rise in short-dated yields.

But this flipped back again after the latest Fed minutes were released, paving the way for a late flourish on Wall Street and positive close for the three main indexes.

The ‘pivot’ message from Fed officials this week has been pretty strong and consistent, and Governor Christopher Waller on Wednesday was the latest to beat that drum. The minutes also suggested policymakers are turning more cautious on rates.

But the PPI number could give traders in Asia pause for thought, especially with U.S. CPI due out later on Thursday.

India’s CPI report, meanwhile, is expected to show a steep fall in annual inflation last month to 5.50% from 6.83%, with moderating food price rises and government subsidies offseting a surge in the cost of crude oil.

(By Jamie McGeever; Editing by Josie Kao)