"Inflation Slowdown Sparks Rally, Fed Cuts Eyed"

Asian markets rally on US inflation slowdown, boosting hopes for Fed rate cuts; S&P 500, Nasdaq hit highs.

By Athena Xu

5/15, 18:55 EDT

Key Takeaway

  • Asian equities set to rally after US markets gain on slowing inflation, hinting at possible Fed rate cuts.
  • Core CPI's 0.3% April rise and soft retail sales bolster the case for Fed easing, with potential cuts seen in September and December.
  • Dollar index hits one-month low, while yields drop, reflecting market optimism for a dovish Fed policy shift.

Market Optimism on Rate Cuts

Asian equities poised for a rally following US market gains on slowing inflation data, creating space for potential Fed rate cuts. S&P 500 and Nasdaq 100 hit fresh highs, with Australian and Japanese futures up. Treasuries saw yields drop, with the 10-year rate falling 10 basis points and the two-year yield down nine basis points, reflecting increased expectations for rate cuts.

Inflation Dynamics and Rate Cut Expectations

Core CPI rose 0.3% in April, aligning with expectations but marking a slowdown from previous readings. This data, coupled with softening retail sales, supports the case for Fed rate cuts. Krishna Guha at Evercore sees a potential September cut followed by another in December, as inflation trends align with economic moderation.

Market Response and Dollar Index Movement

The Bloomberg dollar index fell to a one-month low as the currency weakened against major peers, tracking declining yields. The yen strengthened against the dollar, reflecting market sentiment. Gary Pzegeo at CIBC Private Wealth US noted that the market reacted positively to the core inflation data and retail sales, signaling support for a fall Fed rate cut.

Fed Policy Outlook and Corporate Developments

Fed Bank of Minneapolis President Neel Kashkari reiterated the need to maintain current rates for a prolonged period, questioning their impact on the US economy. Boeing faces potential criminal charges, while Disney CEO Bob Iger plans to reduce marketing expenses for Disney+ streaming service. Oil prices rose on inventory draw, and gold prices climbed for the third consecutive day.

Street Views

  • Krishna Guha, Evercore (Cautiously Optimistic on the market):

    "We see the April print as consistent with a direction of travel for inflation dynamics that – in the context of moderation in the real economy – can yield a September cut followed by a second in December."

  • Gary Pzegeo, CIBC Private Wealth US (Bullish on the market):

    "The market likes it. The news on core inflation was better than expected. Retail sales also showed some deceleration from the previously hot consumer sector. Taken together, this supports a Fed rate-cut in the fall."