Investors see growth in Asian equities, currencies as US CPI eases

Asian equities are set to rise and currencies are primed for a boost following the smallest monthly advance in core US inflation in more than a year, according to investment strategists and portfolio managers. The consumer price index reading supports forecasts for the Federal Reserve to reduce the pace of monetary tightening when it meets later on Wednesday.

Here’s what investors and analysts are saying:

Kellie Wood, deputy head of fixed-income at Schroders in Sydney:

“The market is now anticipating a slower pace of hikes and a moderation of the peak terminal rate in the US,” she said. “We are positioned long US duration and in steeper curves, playing for the peak in bond yields. We believe the market is fully priced for this interest rate cycle given the level of inflation in the US economy.”

Marvin Loh, senior macro strategist at State Street Global Markets:

“Medium-term views still support a weaker US dollar,” he said. “That should be supportive of EM that has real returns, of which Asia is generally lagging other parts of the world. Recession risks are still out there, so indications of a mild recession will be supportive of risk, a harder recession will generally be risk-off for most asset classes.”

Pauline Chrystal, a portfolio manager at Kapstream Capital:

“Given that it is the second softer-than-expected CPI print and that is starting to trend down, we are starting to ask ourselves what if we are seeing the inflection point now? There still isn’t enough conviction for us to answer that question with a strong ‘yes’ but we are definitely starting to think about when should we start adding risk back on,” Chrystal said. “Concerns that are holding us back include inflation remaining at a high level and way above target despite slowing down. That would mean more hikes to come and/or none of the cuts priced in to happen by the end of next year.”

Mark Reade, head of fixed-income desk research at Mizuho Securities Asia:

“The moderation in US CPI is good news for risk assets and will no doubt provide a near-term boost for Asian credit markets. However, with US rates going higher and global growth facing headwinds, it’s unlikely to be smooth sailing for Asian dollar bond spreads during 2023.”

Chamath De Silva, senior portfolio manager for BetaShares Holdings:

“We should expect some opening strength across Asian indices, helped by a much weaker US dollar. Factor performance in the US overnight showed outperformance among growth relative to value, consistent with the sharp drop in US yields, which should also carry across to Asian markets,” De Silva said. “We have an even bigger risk event tomorrow morning our time, so the impact from the CPI could be short-lived.”

Jessica Amir,  strategist at Saxo Capital Markets based in Sydney:

“You’ll probably see a bit of a cautionary rally. The gains weren’t as strong as they have been when we have had weaker-than-expected CPI, so the gains won’t really be waking people out of bed, that’s probably to say the least,” said Amir “Inflation higher for longer — that’s a concern. And we got that pretty much in the details. So sticky, icky inflation will probably keep gains in check on the markets.”

Carol Kong, economist and currency strategist, Commonwealth Bank of Australia:

“Australian dollar can extend gains if the market interprets the FOMC comments to be dovish,” Kong said. “Further falls in Treasury yields and dollar-yen are likely if FOMC chair Powell’s post-meeting comments are perceived as dovish.”

Andrew Ticehurst, rates strategist at Nomura:

“I would expect the Australian bond market to follow the US bond market trend, in a ‘moderate beta’ fashion”, with some decline in local yields and a steeper curve in the near-term,” Ticehurst said. “The data has buoyed market sentiment heading into year-end. We have been positive on the Australian dollar, and this news suggests we could see further gains ahead against the US dollar and against other crosses such as the euro.”

Anthony Doyle, head of investment strategy at Firetrail Investments:

“Consumer staples and REITs are likely to outperform relative to banks and resources. And of course we’ve also seen good news coming out of China in terms of reopening there,” he said. “Risk aversion has definitely declined and I think that momentum will continue now as we head into the remainder of the year.”

--With assistance from Finbarr Flynn.