These dynamics could intensify later this week if U.S. inflation data for June undershoots analysts’ already soft expectations. All else equal, this would be a tailwind for Asian stocks, bonds and currencies.
Several Fed officials on Monday said interest rates will have to rise further to contain inflation, but the end of the tightening cycle is in sight. A New York Fed survey of consumer and inflation expectations was also ‘risk-friendly’.
There are no major economic, policy or corporate events on the Asian calendar on Tuesday, leaving investors to take their cue again from the outlook for U.S. rates, and Chinese growth and stimulus.
Sentiment toward Asian stocks in recent months has been mostly bearish, with the exception of Japan, but a pause in the selling on Monday lifted the gloom a little. Chinese and broader Asian stocks rose for the first time in four session, while the yuan and yen strengthened to two-week highs against the dollar.
The dollar’s slide will cool speculation that Japanese authorities are poised to intervene to support the yen, and a steadier yuan will halt the spiral of a weakening currency, capital outflows and pressure on the central bank to intervene.
But China’s latest inflation figures on Monday were sobering. Annual consumer price inflation in June was zero and producer price inflation slumped to -5.4%, signaling the heaviest deflation since 2015.
