Asian share markets followed Wall Street higher as the growing prospect of several more US rate cuts promised to lower borrowing costs globally, a relief to stressed bond markets and a drag on the dollar.
Indexes in Japan, South Korea and Taiwan all scaled record peaks, urged on by extravagant expectations for AI-related earnings growth.
The US consumer price report had been the last major hurdle to the Federal Reserve cutting interest rates next week, and it proved unthreatening, if a little firm.
Indeed, costs in the CPI that feed into the Fed’s preferred measure of core personal consumption expenditures (PCE) were on the soft side, leading analysts at Citi to predict a steady reading of 2.9 per cent for August.
“It’s an encouraging reading for Fed officials preparing to engage in a series of rate cuts,” said Veronica Clark, an economist at Citi.
“We continue to expect 125 bp of rate cuts over the next five FOMC meetings, with growing risk that the Fed will continue cutting rates below 3 per cent.”
Markets continue to imply a 100 per cent chance of a quarter-point cut to 4.00 per cent-4.25 per cent next week, and ramped up the probability of two further easings this year to around 90 per cent.
The Treasury market has already eased in anticipating with 10-year yields down 20 basis points in the past two weeks, effectively a rate cut given mortgage rates are tied to yields in the United States.
That drop helped soothe concerns in some other major bond markets, particularly in Europe, pressured by political uncertainty and expanding fiscal burdens.
In Asia, Japan’s Nikkei climbed 0.6 per cent to another all-time high, bringing gains this week to 3.7 per cent. South Korea added 1.1 per cent, taking its weekly rise to more than 5 per cent.
Chinese blue chips edged up 0.2 per cent to the highest since early 2022. MSCI’s broadest index of Asia-Pacific shares outside Japan jumped 1.2 per cent.
The joy spread to European shares with the EUROSTOXX 50 futures, FTSE futures and DAX futures all up 0.3 per cent. S&P 500 futures and Nasdaq futures were flat having hit new peaks overnight.
In currency markets, the dollar was back at 147.23 yen , having briefly been as high as 148.20 the previous session. Japanese and US finance ministers on Friday released a statement reaffirming that neither country would target currency levels in their policies.
The euro held at $1.1730, having got a modest fillip on Thursday when the European Central Bank kept rates unchanged and signalled it was in a “good place” on policy.
“This suggests the Governing Council is not inclined to ease in the absence of a large growth shock,” said Greg Fuzesi, an economist at JPMorgan. “We have thus moved back our call for a final rate cut from October to December.”
“We recognise the ECB might be done with cuts, but still think downside growth risks and the inflation outlook justify an easing bias.”
After the meeting, ECB sources told Reuters the December meeting would be the most realistic time frame to debate whether another cut was needed to buffer the economy.
Markets imply only a one-in-five chance of a December easing, and around a 60 per cent probability the ECB is done for this cycle.
In commodity markets, gold was flat at $3,633 an ounce , just off the record top of 3,673.95 hit early in the week.
Oil prices were under pressure after the International Energy Agency predicted an even larger record oil surplus next year as OPEC continues to pump more product.
Brent dropped 0.4 per cent to $66.09 a barrel, while US crude eased 0.5 per cent to $62.07 per barrel.
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