Strong open eyed after US inflation see-saw

The see-saw nature of US market reactions to the latest US inflation figures on Wednesday highlighted investors’ general skittishness right now, as they try to predict whether the Fed will cut interest rates by 25 or 50 basis points next week.

At the market close, the S&P 500 and Nasdaq had posted healthy gains and chalked up their third daily rise, the VIX ‘fear index’ had fallen for a third day, and Treasury yields bounced back from new cycle lows to end higher across the curve.

There was something for everyone in the CPI data, which is perhaps why the bond market swung so much. Core inflation rose a hotter-than-expected 0.3% while the annual headline rate fell to 2.5%, the lowest since February 2021.

It may be a similar picture in Asia on Thursday, although the market open will probably be strong as investors take the baton from Wall Street. Japanese futures point to the Nikkei opening around 1.5% higher.

The yen on Wednesday surged to its strongest level against the dollar this year after Bank of Japan board member Junko Nakagawa said the central bank would raise rates again if inflation moved in line with policymakers’ forecasts.

That echoed recent remarks from BOJ Governor Kazuo Ueda, so nothing new, and the dollar ultimately clawed back nearly all its losses. But the yen’s spike perhaps indicates how sensitive the market is to the prospect of the US-Japanese interest rate gap narrowing.

The BOJ is only expected to raise rates by 25 basis points by the end of next year. But signals that the BOJ is still prepared to tighten policy amid bursts of global market volatility and as other central banks cut rates are yen-supportive right now.

In that context, Japan’s wholesale price inflation for August will be watched closely on Thursday. The annual rate of inflation is expected to have slowed to 2.8% from 3.0% in July, with the monthly rate evaporating to 0.0% from 0.3%.

The wholesale price index in July hit a record high for the eighth straight month.

The Asian economic calendar’s other main point of focus on Thursday is Indian inflation. Economists polled by Reuters expect consumer price inflation to essentially hold steady at a five-year low of 3.5% in August.

That would mark the second month in a row that annual inflation has held below the Reserve Bank of India’s 4.0% medium-term target, but the weak rupee will ensure policymakers don’t get complacent.

A separate Reuters poll showed inflation averaging 4.2% this quarter, accelerating to 4.5%-4.7% in the coming quarters and back above the central bank’s target. Money markets are only pricing in one quarter-point rate cut from the RBI this year.

Here are key developments that could provide more direction to Asian markets on Thursday:
– Japan wholesale inflation (August)

– India CPI inflation (August)

– India industrial production (July)

(Reporting by Jamie McGeever; Editing by Bill Berkrot)