Market Review

This week, in terms of global major asset price performance, stocks > commodities (crude oil) > bonds. Stocks: The weakening yen boosted profit expectations for Japanese export-oriented companies, and the Nikkei 225 index surged by 2.51%; the US stock market report season started well, and the S&P 500 once again hit a historical high. Commodities: Geopolitical tensions continue, and hurricanes in the United States disrupt the supply side of oil, causing international oil prices to soar. Bonds: The US economy is relatively robust, and the market is repricing the expectations for the Federal Reserve to cut interest rates, with US bond yields rising across the board.

Key Points

US inflation in September was higher than expected, and the market re-priced expectations for the Federal Reserve to cut interest rates, with several Federal Reserve officials taking a hawkish stance. The downward trend in US inflation has not changed, but a lower-than-expected decrease may lead to a slower pace of rate cuts.

US CPI in September exceeded expectations across the board, with the overall CPI growing by 2.4% year-on-year, slowing down from the previous 2.5%, reaching the lowest level since February 2021, but exceeding the expected 2.3%. Core CPI grew by 3.3% year-on-year, higher than the expected and previous 3.2%, marking the first rebound in growth since March 2023. The overall CPI and core CPI increased by 0.2% and 0.3% month-on-month, respectively, both exceeding expectations. In terms of sub-items, the rise in housing and food prices contributed about 75% to the overall increase. Affected by the significant decline in energy prices, the September PPI index remained unchanged month-on-month, slightly lower than the market's expected 0.1%, but grew by 1.8% year-on-year, higher than the market's expected 1.6%. The previous value was also revised up from 1.7% to 1.9%, and the core PPI also grew by as much as 2.8% year-on-year, higher than the expected 2.7%, indicating strong inflation stickiness.The complexity and uncertainty of U.S. inflation have once again sparked market concerns, but potential risks in the labor sector have reignited hopes for rate cuts. Data released by the U.S. Department of Labor on Thursday showed that initial jobless claims for the week ending October 5 increased by 33,000 to 258,000, a new high in nearly 14 months, and continuing jobless claims rose to 1.86 million, a new high since the end of July. In addition, the University of Michigan's consumer sentiment index for October fell more than expected, indicating that consumers are more cautious about personal consumption expenditure.

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CME rate futures indicate that market trading expectations for a Fed rate cut in November have fluctuated significantly. The possibility of a 50 basis point cut fell to 0% from about 50% the previous week, while the likelihood of a 25 basis point cut rose sharply to 90%, with the probability of keeping rates unchanged at about 10%. After the September inflation data were released, several Fed officials said they were not worried about the CPI exceeding expectations, but Atlanta Fed President Bostic, a voter, expressed an open attitude towards pausing rate cuts in November. The minutes of the Fed's September meeting released on Wednesday showed that there was still disagreement within the Fed about cutting rates by 50 basis points against the backdrop of no obvious recession in the U.S. economy, with several participants believing that a 25 basis point cut was more in line with the gradual path of policy normalization. Overall, the unexpected inflation has strengthened market expectations that the Fed will slow the pace of rate cuts, with the option of a substantial 50 basis point cut temporarily ruled out, but it has not yet changed the Fed's judgment that inflation is still on a downward trend.

In Japan, wage growth slows down, and expectations for the Bank of Japan's rate hike cool down.

Japan's real wages in August fell by 0.6% year-on-year, marking the first decline in nearly three months, mainly due to the fading impact of increased summer bonuses. If wage growth continues to be sluggish, the virtuous cycle of wage increases driving spending and stimulating demand-driven inflation has not yet formed, and the probability of the Bank of Japan raising rates again in the near future may decrease. Against this backdrop, coupled with the recent strength of the U.S. dollar and the continued weakness of the yen exchange rate, which is a marginal benefit for Japanese export-oriented companies, the Japanese stock market has been boosted. However, it is worth noting that the Bank of Japan's deputy governor recently said that if the economic performance meets expectations, rate hike measures will be taken, which may indicate that the policy stance of the Bank of Japan has not changed.

Overseas, better-than-expected U.S. economic data have led to a repricing of Fed rate cut expectations, with U.S. Treasury yields rising across the board. In addition, the escalation of geopolitical tensions has also posed an obstacle to rate cuts in November. The market currently believes that the probability of a 25 basis point rate cut is nearly 90%, while a 50 basis point rate cut is not priced in. We believe that, considering the latest meeting minutes and the Fed officials' statements on inflation, although the Fed is expected to continue cutting rates, it may be more inclined to do so gradually in order to more fully assess the impact of restrictive monetary policy on the economy. Overall, the overseas rate cut cycle is still expected to continue to provide marginal improvements in liquidity for the Hong Kong stock market, but the swing back of rate cut expectations may bring some disturbance to the valuation repair of the Hong Kong stock market in the short term.