The Federal Reserve opens the door to interest rate cuts, Asian stock markets collectively hit historical highs, and spot gold maintains its upward trend

Yesterday's mild inflation report combined with more signs of a cooling labor market drove Wall Street to a significant rise, with the market speculating that the Federal Reserve will cut interest rates for the first time this year next week.

On Friday, Asian stock markets generally followed the overnight rise in U.S. stocks. Driven by optimistic expectations for earnings growth related to artificial intelligence, Japan's Nikkei index and South Korea's KOSPI index both reached historic highs. The Nikkei index rose 3.7% this week. U.S. Treasury prices rose, with the 10-year Treasury yield briefly falling below the critical level of 4%. Gold prices exceeded their inflation-adjusted peak from 1980.

• The Nikkei 225 index closed up 0.9% at 44,768.12 points, continuing to set a historic high. The Tokyo Stock Exchange index rose 0.4% to 3,160.49 points. The Seoul Composite Index closed up 1.5% at 3,395.54 points, continuing to set a historic high.
• The S&P 500 index rose 0.8%. The Nasdaq 100 index rose 0.6%.
• The U.S. Dollar Index fell 0.3%.
• The euro rose 0.4% to 1.1737 USD.
• The 10-year U.S. Treasury yield fell 3 basis points to 4.02%.
• Spot gold rose 0.4% to 3,648.02 USD/ounce.
• West Texas Intermediate crude oil fell 2.2% to 62.25 USD per barrel.

Employment Data Cooling Overcomes Inflation, Clearing the Path for Rate Cuts

The economic data released this Thursday clearly depicts the tilt of the Federal Reserve's policy balance. The significant jump in initial jobless claims is seen as a clear signal that the labor market is "breaking." Josh Jamner of ClearBridge Investments pointed out that this is the first time in a long while that CPI data has been overshadowed by initial jobless claims data on the same day, highlighting that the Fed's policy focus is shifting towards its mission of "maximizing employment."

Seema Shah of Principal Asset Management stated, "Today's CPI report was overshadowed by the jobless claims report," and she believes that the weakness in employment data will inject more urgency into the Fed's decision-making. Tiffany Wilding of Pacific Investment Management Company (Pimco) also believes that the jobless claims data is "the more significant news."

Analysts generally believe that while inflation data has not completely cooled, its lack of heat is insufficient to prevent the Fed from responding to the weak employment outlook. Ellen Zentner of Morgan Stanley Wealth Management noted, "Currently, inflation is an important secondary plot, but the labor market remains the main storyline," paving the way for rate cuts next week and further easing policies thereafter.

Market Bets on Multiple Rate Cuts This Year, Disagreement on Easing Intensity

With the door to interest rate cuts wide open, the market's focus has shifted from "whether to cut rates" to "how much to cut rates." Futures market data shows that traders believe there is a 100% probability that the Federal Reserve will cut rates by 25 basis points next week, and the likelihood of two more cuts this year has also risen to around 90%.

Skyler Weinand of Regan Capital expects the Federal Reserve to cut rates by 25 basis points next week and to make two more cuts in the remaining months of this year. Krishna Guha of Evercore also believes that the latest inflation data supports the Fed in making three consecutive cuts in September, October, and December.

However, there are some differences in the market regarding the magnitude of the rate cuts. Tiffany Wilding of Pimco stated that while she expects a 25 basis point cut next week, the decision-makers "may discuss a 50 basis point cut." On the other hand, Seema Shah believes that considering the level of unemployment claims is still low compared to 2021, and economic activity and corporate profits have not shown critical signs of recession, the Federal Reserve may not need to take emergency-scale cuts.

Easing Expectations Transmit Globally, Asian Markets Hit New Highs

The Federal Reserve's easing expectations are rapidly transmitting to the global capital markets. On Friday, Asian stock markets generally followed Wall Street higher. Driven by optimistic expectations for profit growth related to artificial intelligence, Japan's Nikkei index and South Korea's KOSPI index both reached historical highs. The Nikkei index rose by 3.7% this week.

In contrast, the European Central Bank's policy stance appears more cautious. The ECB kept interest rates unchanged on Thursday and indicated that its policy is in a "good position." The market currently believes that the probability of the ECB cutting rates in December is only one in five.

In other markets, the dollar fell against the yen to 147.23. In commodities, spot gold remained flat around $3,648 per ounce, still close to the historical high of $3,673.95 set earlier this week. Meanwhile, due to the International Energy Agency (IEA) predicting a record oversupply of oil next year, oil prices are under pressure, with both Brent crude and U.S. crude slightly declining.