A soft Australian CPI print reshapes RBA rate bets, a chip rout deepens in Asia, and US-Iran tensions keep oil prices capped ahead of the Fed decision.
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Soft Australian inflation data reshaped Reserve Bank of Australia rate bets Wednesday, while a deepening rout in chip stocks and renewed US-Iran tensions kept risk appetite in check ahead of the Federal Reserve's interest-rate decision.
South Korea's Kospi sank more than 6%, bringing its monthly loss to 33% and triggering a 20-minute trading halt. The move tracked SK Hynix, which fell as much as 20% even after the company reported strong earnings growth. The stock's slide reflected disappointment over higher capital expenditure plans and pricing in long-term contracts, Aaron Hill, chief market analyst at FP Markets, said.
Hill said the selloff reflected positioning more than the earnings numbers themselves. Investors had piled into chip names expecting perfection, and anything short of that triggered a sharp re-pricing, he said.
In the Middle East, tensions flared again after the US reported intercepting an Iranian missile. The US and Saudi Arabia struck Iran-backed targets in Iraq, bringing the Strait of Hormuz back into focus. Brent crude edged higher. It stayed below its 50-day moving average at $85.68 a barrel, Hill said.
Australia's second-quarter consumer price index came in softer than expected across all measures, sending the Australian dollar lower and the S&P/ASX 200 higher. The RBA's preferred trimmed-mean gauge fell below the minimum market estimate and the central bank's own forecasts.
Investors pared back RBA tightening bets to about 13 basis points by year-end, from 20 basis points a day earlier, Hill said. The market now sees the odds of a hike as roughly even.
Housing prices rose nearly 7% from a year earlier, doing most of the damage on the inflation front, while cheaper fuel pulled transport costs down 2.7% on the month, according to the Australian Bureau of Statistics.
Hill said the wide gap between tradeables inflation (1.5%) and non-tradeables inflation (4.9%) means the RBA is unlikely to explicitly signal a pivot. He expects the central bank to keep its hawkish language at the August meeting.
All attention now shifts to the Federal Reserve. Nearly all of the 88 economists polled by Bloomberg expect the Fed to hold its target rate at 3.50% to 3.75%, though Citadel Securities is among a handful of desks that see a hike as possible.
Hill said two dissenters are expected, likely Beth Hammack and Lorie Logan. Overnight indexed swap markets imply about a 35% probability of a rate increase.
Hill said a hold with two or fewer dissents would likely drive the dollar lower. He called a hike a dollar-positive outcome. The hike pricing partly reflects hedging against volatile oil prices, he said.
His base case is a hold, he said, pointing to softer June inflation prints and a calmer jobs market. The Fed is not releasing economic projections at this meeting, so the focus rests on the dissents and any guidance from Chair Kevin Warsh on the September meeting.
The market is pricing about 22 basis points of easing by September.
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