Disinflation Dynamics Deepen, According to Reuters

By Jamie McGeever

A Look Ahead in Asian Markets

As investors prepare for the upcoming U.S. consumer price inflation figures due on Wednesday, the recent decline in oil and commodity prices is becoming a focal point. These inflation figures will serve as a crucial economic indicator ahead of the Federal Reserve’s interest rate decision next week.

The pressing question for investors is whether the current trends represent a positive ‘risk-on’ sentiment or something else entirely. A decrease in U.S. inflation due to disinflationary dynamics could prompt the Fed to lower interest rates more than anticipated. Such a move would likely decrease Treasury yields and weaken the dollar, potentially benefiting Asian and emerging market assets. Conversely, if these trends signal a drop in global demand and economic activity, investors might be less inclined to invest in riskier markets.

These developments have coincided with more pessimistic growth and inflation indicators from China, suggesting that caution may be warranted. Recent figures showed that year-on-year import growth in China plummeted to just 0.5% in August, overshadowing the better news that exports rose at their fastest rate in a year and a half.

On Tuesday, oil prices fell by 3.7%, while U.S. futures dropped by 4.3%, reaching their lowest daily close since December 2021. Both are down over 25% compared to a year ago, while U.S. gasoline prices have declined by 30% year-over-year. This trend indicates significant disinflationary pressures that could lead to lower inflation readings next year.

The question arises: could inflation fall below the Fed’s 2% target soon? It’s noteworthy that the Fed raised its median inflation projections earlier this year to 2.8% for this year and 2.3% for next. They may be compelled to adjust these forecasts downward in the coming week.

Asian markets will have the opportunity to respond to the U.S. inflation data on Thursday, while Wednesday’s trading appears to be relatively stable and positive. Both the Dow Jones Industrial Average and Nasdaq enjoyed gains for a second consecutive day—the first time either index has achieved this since mid-August.

The Asian economic calendar is sparse, with one of the few notable events being a speech by Reserve Bank of Australia’s Assistant Governor Sarah Hunter. The RBA’s next policy meeting is scheduled for September 23-24, following the Fed’s decision. With the RBA’s consistently hawkish tone, it’s not surprising that market observers regard it as one of the more cautious central banks regarding potential rate cuts.

Interest rate swap markets are still not fully anticipating a quarter-point rate decrease this year, and the yield spread between U.S. and Australian two-year bonds is currently the narrowest it has been in over two years, at just 7 basis points.

Key Developments to Watch for Asian Markets on Wednesday:

• Speech by RBA’s Sarah Hunter
• South Korea unemployment data for August
• U.S. presidential debate scheduled for Tuesday