Asia tech stocks surge as Fed hike odds drop to 50% ahead of jobs report

Key points

• Federal Reserve Governor Christopher Waller stated that recent data shows signs of disinflation, favoring a decision to keep rates unchanged at the upcoming policy meeting.
• The probability of a Fed rate hike this month dropped to approximately 50% from 63%, according to CME FedWatch data.
• Japan’s Nikkei 225 rose 1.3%, with SoftBank Group surging over 10%, though gains were limited by a 2.6% weekly appreciation in the yen.
• South Korea’s KOSPI ended 1.6% higher, with Samsung Electronics and SK Hynix rising 2.4% and 3.7% respectively.
• Hong Kong’s Hang Seng jumped nearly 2%, driven by gains in Alibaba and Baidu, which rose 3% and 4.5% respectively.
• China’s Shanghai Composite fell 0.4% and the CSI 300 edged 0.2% lower, bucking the regional trend.

Background

This development follows a period of volatility in Asian markets where tech stocks swung between gains and losses as investors awaited U.S. employment data. Earlier in August, weak July jobs data, showing a 23,000 decline in jobs, had reinforced expectations that the Federal Reserve would pause rate hikes, leading to a stock rally. However, recent weeks saw markets wobble as rate hike bets rose again, with long-term Treasury yields volatile. The current shift in sentiment reflects a renewed focus on disinflation signals from Fed officials, contrasting with previous periods where inflation concerns kept hike expectations elevated.

Why it matters

The reduction in Fed rate hike expectations directly impacts global equity valuations, particularly for interest-rate-sensitive technology sectors. A pause in rate hikes supports higher stock prices by lowering discount rates for future cash flows. Additionally, the strength of the U.S. dollar and Treasury yields influences capital flows to emerging markets like Asia. The upcoming U.S. jobs report is critical as it will provide the next major signal for Fed policy, potentially reversing or reinforcing the current market optimism. Geopolitical tensions affecting oil prices also remain a key inflation risk that could alter the Fed's stance.

What to watch

Investors will closely monitor the U.S. nonfarm payrolls report released later on Friday. A weak report could further bolster expectations that the Fed will avoid raising rates, while a stronger-than-expected reading could revive rate hike bets. The Bank of Japan’s September meeting is also a focus, with markets pricing in a potential rate hike, which has contributed to the yen's recent strength. Oil prices may continue to fluctuate based on geopolitical developments in the Middle East, particularly regarding the Strait of Hormuz.