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Investors across Asia-Pacific markets are awaiting key inflation figures from the region in the week ahead, leading to mixed trading on Monday.
Singapore and Australia are slated to report August inflation data this week, while Japan will unveil inflation numbers for Tokyo, often seen as a leading indicator for the country. With price pressures still top of mind, the incoming reports will be closely watched.
In early Monday trading, Australia’s benchmark S&P/ASX 200 index futures were down 0.29%. Japan’s Nikkei 225 rebounded 0.66% after losses last week to reach 32,610, while the Topix climbed 0.45% to 2,171.
Meanwhile, South Korea’s Kospi fell 0.28% and the tech-heavy Kosdaq tumbled 1.34%, extending declines from the previous week. Hong Kong’s Hang Seng slipped 0.65% and the Shanghai Composite in mainland China dropped 0.37%.
U.S. stocks logged a fourth consecutive day of losses on Friday, capping the S&P 500 and Nasdaq’s worst weeks since March. Lingering concerns over the Federal Reserve’s hawkish stance on interest rates weighed on sentiment. The Dow Jones Industrial Average dipped 0.31%, the S&P 500 shed 0.23% and the Nasdaq Composite slid 0.09%.
As investors evaluate the impact of tighter monetary policy, this week’s inflation reports will provide critical clues on price trends in Asia-Pacific.
Singapore, Australia Inflation on Deck
On Tuesday, the Monetary Authority of Singapore is expected to release its Consumer Price Index for August. The country’s inflation rate hit 7% in July, the fastest pace in 14 years, driven mainly by food and electricity costs.
Economists predict inflation likely peaked in July and forecast a slight moderation to 6.9% in August. However, core inflation — which excludes accommodation and private transport costs — is projected to edge up to 5.1% from 5% in July, underscoring still elevated price pressures.
“Despite signs of peaking headline inflation, the Monetary Authority of Singapore will likely continue tightening policy at the next meeting in October,” said Economist Chua Han Teng of DBS Bank.
Across the Tasman Sea, the Australian Bureau of Statistics will publish Q2 Consumer Price Index data on Wednesday. Australia’s inflation rate surged to 6.1% in the second quarter, the highest level in 21 years. The RBA has already implemented five consecutive rate hikes to curb rising prices.
Another hot inflation reading could force the central bank to continue its aggressive tightening campaign, even as higher borrowing costs dampen economic growth.
All Eyes on Tokyo CPI
On Friday, Japan’s Ministry of Internal Affairs and Communications will release the Tokyo Consumer Price Index for September.
As a preview of nationwide inflation trends, the capital’s CPI is closely tracked by the Bank of Japan in policy deliberations.
Tokyo’s inflation rate rose to 2.6% in August, the fastest clip in nearly eight years but still below the BOJ’s 2% target. Nonetheless, rising energy costs pushed up prices for the 15th straight month.
Analysts expect Tokyo’s CPI to jump 2.8% in September, signaling broader price pressures across Japan. However, the BOJ remains steadfastly dovish compared to global peers, concerned that rate hikes could damage the country’s fragile economy.
U.S. Stocks Extend Losses for the Week
On Wall Street, the S&P 500 logged its longest weekly losing streak since June, dropping 3.7% over the past five days. The tech-heavy Nasdaq lost 4.4% for the week, also marking its worst stretch since mid-June.
The declines came after the Federal Reserve reaffirmed its commitment to taming inflation through tighter monetary policy. Markets are repricing expectations for how high interest rates may rise and how long they will remain elevated.
“There had been hope the Fed would pivot or pause soon, and that’s not likely to happen,” said Commonwealth Financial Network advisor Brad McMillan. “We’re in a new world where the Fed is seriously fighting inflation, and there’s a good chance we’re going to have a recession.”
All 11 S&P 500 sectors finished in the red last week, with consumer discretionary and communication services recording the steepest drops. Mega-cap technology giants like Apple, Microsoft, Amazon and Google parent Alphabet all posted heavy losses.
The Fed lifted rates by 75 basis points this week and forecast the benchmark rate could exceed 4% by the end of 2022. Central bank officials also expect to keep policy restrictive for some time to rein in inflation.
Analysts See Possible October Bounce
Historical data reveals a tough August and September for stocks can give way to a strong rebound in October.
When the S&P 500 ended August and September down at least 1%, it notched an October gain nine out of the last 10 times, according to Ryan Detrick of Carson Group. The size of the increases is also notable.
After drops in August and September 2022, the S&P 500 rallied 8% last October. Following slides in the two months in 2015, the index jumped 8.3% in October. And a 10.8% October climb came on the heels of August and September declines in 2011.
“As bad as things feel, don’t lose faith just yet,” Detrick said, noting this October effect. With inflation still top of mind, however, the data suggests stocks could see significant swings in the month ahead.
Oil’s Surge May Have Further to Run
In the commodities sector, oil prices continued their upward march after the OPEC+ alliance announced output cuts this month. JPMorgan now says crude could climb as high as $150 per barrel in a bullish scenario.
“We argue that the foundation remains in place for deep backwardation and higher prices from current levels,” wrote senior energy analyst Christyan Malek. JPMorgan raised its fourth quarter Brent forecast to $110 per barrel from $98 previously.
The investment bank upgraded its recommendation on the global energy sector to overweight, the equivalent of buy. Malek believes the industry has entered a multi-year “supercycle” that will lift oil majors like Exxon and Chevron.
Oil prices pulled back slightly on Monday but remained elevated near $90 per barrel. The latest rally reignites concerns over inflation, especially for key Asia-Pacific crude importers like China, Japan and South Korea.
Dollar Index Eyes 10 Straight Weeks of Gains
In the currency markets, the U.S. dollar maintained its upward momentum against a basket of peers. The Dollar Index hovered near a six-month high above 105, on pace to notch a 10th consecutive week of gains.
The greenback has surged this year as the Fed tightened policy and recession fears gripped Europe. Strategists say the dollar could continue appreciating into next year as central banks diverge.
“Fed hawkishness, China growth concerns and EU gas supply issues argue for more USD strength,” wrote MUFG currency analyst Lee Hardman.
A stronger dollar makes commodities priced in the currency more expensive for foreign buyers. This has exacerbated food and energy inflation in import-reliant Asia-Pacific economies.
Fed Rate Hike Cycle Nears End: Citi
Analysts at Citi believe the Fed and European Central Bank are close to completing their rate hike campaigns amid contrasting growth trajectories.
“From a central bank cycle point of view, duration is attractive as rate hiking cycles are coming to a quick end,” said strategist Dirk Willer in a Thursday note.
The U.S. economy remains surprisingly resilient, meaning the Fed may need to continue tightening, Willer explained. However, with growth sputtering in Europe, the ECB has less room to keep aggressively raising rates.
Willer remains bullish on Latin American stocks, which he dubbed “cheap cyclicals”, while advising clients to short British equities given vulnerability to a weaker sterling.
As the third quarter wraps up, Asian markets face no shortage of risks from central bank tightening, the strong dollar, China’s faltering economy and the ever-present Ukraine war. While volatility looks set to persist, any signs of cooling inflation could provide a much-needed reprieve.