Anticipation in Asian Markets Builds as US Inflation Test Looms, Rising Oil Prices Heighten Price Concerns

13 Sep, 2023

Anticipation in Asian Markets Builds as US Inflation Test Looms, Rising Oil Prices Heighten Price Concerns

Asian markets remained subdued following a shaky performance on Wall Street, as investors prepared for the release of crucial U.S. inflation data on Wednesday. Meanwhile, escalating oil prices added to concerns about sustained price pressures, further complicating the outlook for interest rates.

The euro saw a slight increase in value, and markets began to anticipate a rate hike by Europe's central bank on Thursday, driven by a Reuters report revealing the European Central Bank's (ECB) expectation that inflation would remain above 3% next year, well above its 2% target.

In the Asian markets, MSCI's broadest index of Asia-Pacific shares, excluding Japan, showed minimal movement, while Tokyo's Nikkei declined by 0.2%. Australia's resource-heavy shares dropped by 0.7%, Chinese blue chips remained stable, and Hong Kong's Hang Seng index recorded a 0.6% gain.

The upcoming U.S. Consumer Price Index (CPI) report on Wednesday took center stage, offering insights into the inflation outlook and potential Federal Reserve actions. While core CPI was expected to cool to 4.3% year-on-year in August from 4.7%, rising energy costs were likely to keep headline inflation elevated. The recent surge in oil prices, reaching ten-month highs, was also a matter of concern for the Fed.

Ray Attrill, a currency strategist at National Australia Bank, noted, "What's happening with oil and headline inflation is still too soon for the Fed to be signaling the all clear Regarding the potential risks associated with implementing incremental tightening measures before the completion of their actions. When you have that sort of volatility in the food and energy components, the worry is that if it's persistent, it does tend to bleed into core inflation measures over time."

Oil prices continued to rise, with Brent crude futures settling at $92.24 per barrel, nearing their recent ten-month peak due to ongoing supply concerns. U.S. West Texas Intermediate crude futures saw a 0.3% increase to $89.08.

On Wall Street, the S&P 500 declined by 0.6%, the Nasdaq fell by 1%, and the Dow Jones remained mostly flat. Apple's shares dropped by 1.8% after unveiling new iPhones without increasing prices amid a global smartphone surplus. Oracle's shares also tumbled by more than 13% following a disappointing forecast for current-quarter revenue.

The euro strengthened by 30 pips to $1.0765 in response to the Reuters report, and markets began to lean towards expecting a rate hike by the ECB on Thursday, with a 75% probability, compared to previous uncertainty.

The U.S. dollar regained some of its recent losses against the yen, rising by 0.2% to 147.35 yen, following comments from Japan's top central banker about a possible early exit from its negative interest rate policy.

Treasury yields climbed higher on Wednesday, with the two-year note reaching 5.0264%, compared to the U.S. close of 5.005%. Ten-year yields held at 4.2881%, up from the previous close of 4.264%.

The price of gold remained steady at $1,912.85 per ounce.