Asian equities are likely to trade positively following a significant rally in U.S. stocks and bonds on Wednesday. This surge was driven by a softer-than-expected Consumer Price Index (CPI) report, raising market expectations for Federal Reserve rate cuts later this year. Additionally, U.S. Retail Sales data fell short of expectations, showing no growth month-over-month against an anticipated 0.4% rise. The New York Fed Manufacturing Index also disappointed, contributing to the day’s weaker economic indicators. Consequently, the S&P 500 closed at a new all-time high. These figures suggest a cooling in inflationary pressures, prompting investors to fully price in two rate cuts by the Fed this year, with the first expected by September. The dovish tilt will boost Asian equities, FX and Bonds, due to its rate sensitivity aspect. US yields are trading lower.
Traders should monitor the bond and FX markets for potential risk-on flows into Asian assets, as declining U.S. yields could bolster equities and FX in the region. Notably, the Japanese yen traded higher, and cyclical currencies benefited from the stock market rally. Looking ahead, market participants will focus on further Fed commentary and U.S. jobless claims. Positioning and price action indicate that markets will closely scrutinize any dovish interpretations of the data. These reports will be crucial in shaping expectations for the Fed’s next moves and the overall economic outlook. Additionally, options expiry trading begins today, with Friday being the last trading day. Typically, price action becomes sticky, and some selling flows are observed, but given the recent dovish and bullish sentiment, markets may continue buying dips in major risk assets.
