Asia wrap: Friday follies “Oil volatility remains the lynchpin”

The most immediate takeaway from yesterday’s hotter-than-expected US CPI—and the subsequent Fed chatter—is that Fed pricing is now stuck in easy gear. With the Fed less likely to change course anytime soon, external factors like Middle East tensions and potential China stimulus will drive the dollar. Risks remain tilted to the upside, even as oil prices have eased from overnight highs. Hurricane-related supply concerns may pivot toward short-term demand destruction woes, but the geopolitical undercurrents in the Middle East are still running hot.

As I mentioned in last weekend’s report on the CPI front, "At turning points in monetary policy cycles, it’s common for indicators like employment and inflation to give mixed signals, muddying the outlook." (I suspect the initial rate cut juices consumers.) Well, guess what? The U.S. is smack in the middle of one of those periods. The latest US data has thrown mixed signals at the Fed and the markets. CPI inflation was hotter than anticipated, with core inflation accelerating from 3.2% to 3.3% YoY, thanks to another 0.3% month-on-month print. Typically, we’d have seen a dollar rally, but some crucial factors have muted the FX reaction.

Markets and the Fed are laser-focused on the jobs market, making the CPI prints send only small ripples, as noted in today’s opener. With a room full of Fed doves, hawkish repricing didn’t have much runway, as the market is still clinging to 45 basis points of cuts by year-end. Despite the hotter CPI, three key FOMC heavyweights—Williams, Goolsbee, and Barkin—shrugged it off, while only the hawkish Raphael Bostic floated the idea of pausing the rate cut train.

But let’s be real: data revisions could flip the script fast. What seems like a smooth sailing Fed path today could veer wildly if revisions tell a different story—and that knife cuts both ways.

Hence, it’s not really about when or if they cut in November; it’s about the total cumulative cuts on the table. That’s why all eyes are on the following NFP jobs report for the big reveal.

For now, the market is holding onto small dollar longs. Why? Oil volatility remains the linchpin. Crude prices are gyrating wildly as the market awaits Israel's next move against Iran, which could severely disrupt the oil supply. Israel's defence minister has already hinted their retaliation will be “above all, surprising.” With Iran vowing to strike back, tensions will likely keep simmering, providing a solid bid for the dollar and oil in the near term.

Meanwhile, eyes are also on tomorrow’s much-anticipated stimulus announcement from China. The consensus is for a 2 trillion yuan package—not as large as some had hoped (5 to 10 trillion yuan), but the market reaction on Monday will depend more on the timing and the specific targets for the extra spending. Any boosts to consumer spending will be a green light for long Asia FX traders, with bullish ripple effects across China and regional stocks and global commodity markets.