Asian Stocks Soar as US Inflation Worries Eased

Asian stocks enjoyed their best week in two months after the US inflation rate was revealed to be lower than expected, leading investors to reassess the likelihood of a Federal Reserve interest rate hike next month.

The CME FedWatch tool showed that the odds of a hike fell to 35% from 55% just a week earlier, which helped boost US government bonds and reduce pressure on the US dollar. This easing in global financial conditions typically means easier borrowing and more risk-taking by investors, who tend to flow towards markets with higher potential returns.

The result was evident in equities, with MSCI's Asia-Pacific index outside Japan rising 2.7% for the week, while Japan's Nikkei jumped over 5%. However, the fragile backdrop remains a concern, as oil prices are poised for a significant weekly gain, which could feed back into inflation and revive Fed-hike worries.

For markets, the connection between the US rate narrative and Asia's rally is clear. When traders price in fewer near-term Fed hikes, US yields tend to cool, and the dollar can lose some support, making it easier for investors to engage in carry trades.