Asian equities were primed for some losses early Thursday after a fairly muted Wall Street reaction to in-line US inflation data that still supported expectations for Federal Reserve rate cuts.

Equity futures in Japan and Hong Kong fell, while those in Australia advanced and US contracts were little changed. The S&P 500 closed 0.4% higher Wednesday, while the Nasdaq 100 added 0.1%, after year-on-year core consumer prices - which excludes food and energy costs - increased at the slowest pace since early 2021 in July.

The inflation print was broadly in line with expectations and bolstered forecasts for a Federal Reserve rate cut next month. The swaps market is currently fully pricing in one 25 basis point cut in September and 100 basis points of cuts through to the end of the year - indicating a degree of confidence that the Fed will deliver one 50 basis point cut in the remaining three Fed meetings of 2024.

Treasuries ended Wednesday little changed, as did an index of the dollar, while the yen weakened slightly against the greenback to trade at 147 per dollar. The Japanese currency was little changed early Thursday.

At Evercore, Krishna Guha said the CPI was not perfect, but it was good enough as it was consistent with a tame read on the Fed’s preferred inflation measure. In addition, the central bank has disavowed data-point dependence, and is looking at the wider outlook and balance of risks.

“This is now a labor data-first Fed, not an inflation data-first Fed, and the incoming labor data will determine how aggressively the Fed pulls forward rate cuts,” Guha noted.

In Asia, data set for release Thursday includes gross domestic product in Japan, the People’s Bank of China’s Medium-Term Lending Facility and July trade for Indonesia. Markets in South Korea and India will be closed.

Investors will be focused on further market response to the decision of Japanese Prime Minister Fumio Kishida to bow out of the ruling Liberal Democratic Party’s leadership election next month. The move will trigger “a period of modest political uncertainty,” according to Taro Kimura, Senior Japan Economist for Bloomberg Economics. “That’s hardly a welcome prospect for markets in light of the recent turmoil in stocks and the yen and the political spotlight on the Bank of Japan’s rate hike last month.”

The S&P 500 extended its advance into a fifth straight day on Wednesday, the longest winning streak in more than a month. Most of its major groups gained, with financial, energy and tech shares leading the charge. In late trading, Cisco Systems Inc. climbed on a solid revenue forecast. 

Megacaps were mixed, with Nvidia Corp. up and Alphabet Inc. down. Wall Street’s “fear gauge” - the VIX - continued to subside, dropping to around 16. That’s after an unprecedented spike that took the gauge above 65 last week. 

Fed Bank of Chicago President Austan Goolsbee said he is growing more concerned about the labor market than inflation, in an interview with Bloomberg News Wednesday.

At Nationwide, Mark Hackett says “calming macro fears” are among the factors providing an improved backdrop for equities. The stress of the market decline is a “fading memory,” he noted.

“The inflation data has been good enough to allow the Fed to start cutting rates in September, but does not give them a reason to cut aggressively,” said Brian Rose at UBS Global Wealth Management. “The decision whether to cut by 50 basis points instead of the usual 25 basis points may come down to the August labor report.”

Rose also notes that Thursday’s retail sales data is another critical release as the main downside risk to his base-case scenario of a soft landing is a pullback in consumer spending.

“The US economy is sustainably cooling, and the labor market is exhibiting a bit of slowing,” said Neil Sun, a BlueBay portfolio manager at RBC Global Asset Management. “However, we are not overly concerned over US recession risks in the short-term. We stand ready to thoughtfully capitalize on any pockets of volatility should underlying trends of cooling inflation and sustainably slowing US economy continue.”

In commodities, oil clawed back gains in early trading after falling for a second session on Wednesday. Gold was steady early Thursday after two daily declines to trade around $2,447 per ounce.

  - Bloomberg