Asian equities rallied strongly as South Korea's Kospi surged 4.48%, by far the region's standout performer. The MSCI Asia Pacific Index gained 0.4%, with Japan and South Korea leading the advance. This positive sentiment followed gains in US benchmarks, with the S&P 500 rising nearly 1% Thursday to a record high and the Nasdaq 100 climbing over 1% to its highest level since late June as increased hyperscaler spending buoyed tech shares. Japan's Nikkei 225 climbed 1.68% and the Topix added 0.95%, while Hang Seng futures slipped 0.6%, pointing to caution creeping back into that market even as the rest of Asia rallied. The retreat in oil prices also raised optimism that the Federal Reserve would hold interest rates steady next month.
US consumer prices rose in line with forecasts in July, with the consumer price index increasing 0.1% from the previous month, as reported by Business Standard. The small increase could weaken the argument for an interest rate increase from the Fed next month. Money markets are predicting a 40% chance of a rate hike, down from 54% a week ago, according to CME Group's FedWatch. The data eased fears of possible Federal Reserve rate hikes, with traders trimming their bets on further policy tightening. Thursday's US producer price index data showed wholesale inflation cooling by more than economists had projected in July, with the producer price index rising 4.7% from a year earlier, down from a 5.5% annual increase in June, and was unchanged from the previous month. Combined with last week's weaker jobs report, the data reduced the odds of a September rate hike to below 40% in money markets.
Oil prices declined as easing inflation worries and a firmer risk appetite in stocks appeared to sap demand for safe-haven assets. US crude fell 0.83% to $82.58 a barrel and Brent crude dropped to $88.35 per barrel, down 0.71%, according to Business Standard. The decline came despite persistent price pressures and volatile oil markets continuing to complicate the outlook for policymakers. Brent was little changed around $87.20 a barrel early Friday after dropping more than 2% in the previous session, snapping a six-day rally. The easing inflation data reduced the appeal of oil as a safe-haven investment. However, oil prices remained elevated amid ongoing geopolitical tensions, with Iran and the US remaining deadlocked over efforts to agree a permanent end to the war in the Gulf, with talks to revive a June interim agreement making no headway. Oil prices steadied after Thursday's sharp decline, with Brent crude hovering near $87.20 a barrel.
Market participants remained focused on the Japanese yen, which held steady near the 159.45-159.50 per dollar mark amid growing speculation that the Bank of Japan would hike interest rates next month. The yen has weakened more than 1% this month, eroding some of the gains achieved through joint US-Japan efforts to shore it up in late July. Against the yen, the dollar softened 0.06% to 159.32, while the dollar index remained steady at 99.93. The offshore yuan was little changed at 6.7436 per dollar. Reports emerged that Prime Minister Sanae Takaichi's administration backed a Bank of Japan rate hike, with a raise now expected in September or October, according to a Bloomberg report. The Bank of Japan is likely to raise rates in either September or October, according to people familiar with the matter, with concerns at the central bank that yen weakness will fuel inflation converging with the government's desire to reinforce the impact of recent US-Japan currency intervention.
Despite the positive inflation data, above-target inflation and widening budget deficits have helped keep longer-dated Treasury yields elevated. The yield on benchmark US 10-year notes rose 0.62 basis points to 4.688%, from 4.682% late on Wednesday, as reported by Business Standard. Thursday's 30-year bond sale is expected to price at the highest financing rate in 25 years, after a $42 billion auction of 10-year notes drew the highest yield since 2007. Treasuries rallied Thursday as US wholesale inflation cooled in July, sending yields across maturities lower, with the yield on the rate-sensitive two-year bond falling six basis points to 4.14%. Even as Treasuries rallied, the US sold 30-year bonds at the highest yield in a quarter century, underscoring the premium investors are demanding to finance the nation's deficits. Market analysts suggest that the combination of cooling inflation and weak jobs data may give the Fed more time to wait before implementing rate hikes, though persistent price pressures and volatile oil markets remain concerns for policymakers. Traders were also encouraged by renewed enthusiasm for artificial intelligence stocks, recovering from July's semiconductor slump, even as unresolved West Asia tensions lingered as a risk factor.
