Reasons for the Rise in Asian Stocks Due to Expectations of a Fed Rate Hike Slowdown and the Impact of CPI｜Quanti 投資の教科書｜岡田 慎一

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The direct cause behind the rise in Asian stocks due to expectations of a Fed rate hike slowdown is the cooling of the US inflation indicator, the CPI (Consumer Price Index). Market participants confirmed that the month-on-month increase in CPI had fallen to around 0.3%, leading them to conclude that the necessity for the Fed to continue aggressive rate hikes had diminished. This expectation caused the US 10-year Treasury yield to drop from the 4.0% range to the 3.8% range, forming a trend of a weaker dollar and a stronger yen. In the Asian currency sphere, a reversal of the ‘carry trade’—where funds flow back from the US to emerging markets—was observed, indicating a recovery in risk appetite. In particular, Japanese stocks and South Korean semiconductor-related stocks saw expanded gains, benefiting simultaneously from their perceived undervaluation in dollar terms and expectations of economic recovery. Investors prioritize the ‘probability of a policy shift’ indicated by the CPI figures over the figures themselves, and this difference in interpretation becomes the dividing line for asset allocation.

The mechanism behind the gap between CPI figures and market reactions

There are cases where stock prices do not rise even if the CPI falls below market expectations. This is because the market is wary of the persistence of inflation, as indicated by the robustness of core CPI (excluding food and energy). For example, even if headline CPI slows as expected, if core CPI continues to trend at 5.0% or more year-on-year, the possibility of the Fed continuing to raise rates will be re-evaluated. Because Asian stocks are sensitive to US monetary policy, accurately interpreting this divergence between ‘headline’ and ‘core’ is the key to capturing upward phases. Investors are determining whether the scenario of a rate hike slowdown is certain by combining the trend of core CPI with statements from high-ranking Fed officials, rather than relying on a single figure.

How to interpret CPI indicators and their impact on Asian stocks
Focus on Headline CPI

• Confirm a 0.3% month-on-month decline

• Early expectations for the end of Fed rate hikes

• Asian stocks rise due to a weaker dollar and stronger yen

• Inflow of funds into risk assets accelerates

• Focus on Core CPI

• Wary of robustness exceeding 5.0% year-on-year

• Assume continued Fed rate hikes

• Asian stocks adjust due to a stronger dollar and weaker yen

• Flight of funds to defensive assets occurs

CPI checklist to sustain the rise in Asian stocks

To sustain the rise in Asian stocks driven by expectations of a Fed rate hike slowdown, it is necessary to analyze the components of the CPI in detail. In particular, the weighting of energy prices and housing-related costs is important. The decline in energy prices may be a temporary factor, and housing-related inflation may persist for a long time as a lagging indicator. Investors observe which indicators the market reacts to within hours of the CPI release to determine if that reaction is sustainable. Furthermore, geopolitical factors, such as whether Asian central banks will follow US policy, cannot be ignored. Observations on whether the Fed’s rate hike slowdown will promote stability in Asian currencies or lead to currency depreciation will influence volatility in the stock market.

• Has the year-on-year increase in core CPI fallen to 4.5% or below?

• Has the US 10-year Treasury yield fallen below 3.9%?

• Has the dollar-yen exchange rate moved in the direction of a stronger yen, from the high 140s to the low 130s?

• Has the Asian currency basket index risen?

Investment Strategy for Asian Stocks During a CPI Deceleration Phase

In a phase where a deceleration in CPI is confirmed, sectors within Asian stocks that are particularly dependent on the U.S. economy benefit. For example, Japan’s automotive industry and South Korea’s electronic components industry are expected to see improved performance due to the combination of expectations for a U.S. economic recovery and the depreciation of the yen and won. On the other hand, for resource-rich countries like Australia and Canada, it is necessary to carefully evaluate the impact that lower U.S. interest rates have on commodity prices. It is important for investors to flexibly perform sector rotation based on macroeconomic scenarios derived from CPI data. While a slowdown in Fed rate hikes is a positive factor that supports Asian economic growth, it also carries the risk of reigniting inflation. By continuously monitoring CPI trends and minimizing the divergence between market expectations and reality, investors can maximize the upside potential of Asian stocks.

8 Recommended Reasons for the Rise in Asian Stocks Due to Expectations of a Slowdown in Fed Rate Hikes and the Impact of CPI

The main reason Asian stocks rose amid expectations of a slowdown in Fed rate hikes is that the easing of upward pressure on U.S. interest rates curbed capital outflows from emerging markets. Specifically, when the U.S. 10-year Treasury yield fell by 0.5 percentage points month-on-month, the Asian emerging market stock index rose by 2.8%. This movement was directly triggered by the market pricing in the end of inflation following CPI (Consumer Price Index) results that came in below expectations.

Correlation Between CPI Figures and Asian Stocks

When CPI shows figures lower than expected, the market judges that it is difficult for the Fed to continue significant rate hikes. For example, while the previous month’s core CPI was 2.4% year-on-year and the forecast was 2.6%, the actual figure was revised downward to 2.3%. This fueled expectations that the peak of U.S. policy interest rates would arrive sooner, leading to buybacks in risk assets such as Asian stocks. In particular, in the Japanese and South Korean markets, which are susceptible to exchange rate fluctuations, the moderation of the yen and won depreciation served as a factor for the rise by improving the earnings outlook for export companies.

Comparison of CPI Outlook and Market Reaction
When CPI exceeds expectations

• Expectations for additional Fed rate hikes strengthen

• U.S. Treasury yields rise, and capital flows out of emerging countries

• Asian stocks trend downward due to risk-off sentiment

• When CPI falls below expectations

• Expectations for a slowdown or cut in interest rates take precedence

• U.S. Treasury yields fall, and capital flows into emerging countries

• Asian stocks trend upward due to risk-on sentiment

8 Related Indicators and Stocks to Watch

To accurately grasp the impact of Fed policy changes on Asian stocks, it is necessary to analyze not just a single CPI, but a combination of 8 related indicators and stocks. These serve as important clues for early detection of changes in market sentiment.

• U.S. CPI Year-on-Year: A direct measure of inflationary pressure

• U.S. 10-Year Treasury Yield: The benchmark for global cost of capital

• Dollar-Yen Exchange Rate: An indicator of Japanese corporate performance and exchange rate impact

• South Korea’s export performance: A leading indicator for semiconductor demand

• China’s manufacturing PMI: The health of the global economic engine

• Asian emerging market bond yields: A reflection of credit risk

• S&P 500 futures: A signal indicating the outlook for US stocks

• VIX index: Measuring risk as the market’s fear gauge

Specific strategies investors should adopt

Immediately after CPI results are released, market volatility increases, so it is important to look past short-term price movements and identify medium-term trends. For example, if the CPI is lower than expected, rather than investing the full amount immediately, it is effective to use a strategy of making exploratory purchases with about 20% to 30% of your position, and then gradually increasing your holdings while confirming subsequent statements from Fed officials and additional economic indicators.

Furthermore, by diversifying your portfolio based on an understanding of sector-specific characteristics—such as domestic demand-oriented sectors that are less affected by exchange rates, or tech sectors that are sensitive to Fed policy changes—rather than looking at Asian stocks as a whole, it is possible to maximize returns while managing risk.

Summary

We have organized the background behind the rise in Asian stocks, which was driven by the combination of expectations for a slowdown in Fed rate hikes and the cooling of CPI statistics. The market is pricing in a peak in interest rate hikes, and capital inflows into risk assets are accelerating. In emerging markets in particular, the reduction in interest rate burdens is directly linked to improvements in corporate performance, making the resilience of stock prices stand out.

Structural changes in Asian stocks brought about by expectations of a rate hike slowdown

When the prospect of the Fed narrowing the scale of its policy interest rate hikes emerges, dollar interest rates fall, easing pressure on the yen and emerging market currencies. This creates room for central banks in Asian countries to also slow their pace of rate hikes, leading to expectations for a recovery in domestic demand. Specifically, it is estimated that a 1-point drop in interest rates has the effect of boosting consumption by about 5% annually for groups with high mortgage balances.

The slowdown in CPI growth is a signal that the pressure of rising costs for companies is easing. If the suppression of raw material costs and labor costs is realized, corporate profit margins will turn toward a recovery, prompting a re-evaluation of stock price P/E (price-to-earnings) ratios. This effect is expected to be particularly pronounced in sectors with sensitive cost structures, such as manufacturing and retail.

Three points investors should check right now

• Changes in the tone of Fed officials’ statements: Check whether the emphasis on continuing rate hikes is decreasing and mentions of economic indicators are increasing.

• Inflation rates in Asian countries: Observe whether the CPI of major countries such as Japan and South Korea is converging toward target values (around 2%).

• Exchange rate trends: Monitor whether the trend of a weaker US dollar is accelerating and whether emerging market currencies are beginning to bottom out.

Future Risk Factors and Appropriate Risk Management

Even if the market rises as expected, the possibility remains that geopolitical risks or supply chain disruptions could suddenly emerge. Furthermore, if the CPI accelerates again, the Fed’s hawkish stance could reignite, posing a risk of a sharp decline in stock prices. Therefore, it is important to keep at least 20% of all assets in cash or short-term bonds to serve as funds for additional purchases in the event of a sudden drop.

This rise should be viewed as the beginning of a structural recovery phase accompanying the normalization of the interest rate environment. By making investment decisions with an eye toward medium-term improvements in corporate earnings rather than being swayed by short-term price movements, you will be able to achieve stable returns. Please manage your portfolio calmly while paying attention to the gap between market expectations and reality.