Asian stocks dip, bonds in focus after torrid September

Asian markets experienced a subdued sentiment on Thursday (Oct 1) as global bonds faced pressure following a sluggish September. Traders evaluated a slower-than-anticipated rise in US inflation in August, which reduced the likelihood of a rate hike later in the month. Blockbuster earnings from AI chipmaker Micron did not bolster the floundering mood in Asia, while ongoing peace talks between the US and Iran to end the seven-month-long Middle East war kept oil prices elevated, further dampening sentiment.

MSCI's Asia-Pacific index outside Japan dropped 0.2%, with South Korea's Kospi declining 0.14%. However, Japan's Nikkei rallied over 1% as semiconductor-related shares increased. Nasdaq and S&P 500 futures were up 0.3%. European stock futures slipped 0.75% early on.

Charu Chanana, chief investment strategist at Saxo, noted that Micron's earnings were a testament to AI and memory demand, but markets are beginning to question if they are nearing a peak memory shortage, despite demand still exceeding supply. The macro backdrop is becoming more mixed, with softer US data taking some pressure off Federal Reserve expectations and shorter-term yields, but long-term yields remain high, keeping the cost-of-capital concern alive.

US Treasury yields surged in September, reaching a 5.306% for the 10-year note and a 5.634% for the 30-year, both the highest levels since mid-2007 and June 2002, respectively. Market focus is on the duration of US Treasury yields staying above the psychologically significant 5% level. Darren Shames, global head of rates sales at Nomura, stated that the US government debt of over US$40 trillion and the fiscal situation show no signs of improvement, making the significance of the 5% level questionable, especially historically.

US inflation increased less than expected in August, with price pressures moderating compared to previously reported figures. This led traders to lower their expectations for a Federal Reserve rate hike on October 28. The probability of a rate hike this month is now at 38%, down from 50% a day earlier, according to CME's FedWatch tool.

The Federal Reserve raised rates in September for the first time in three years and signaled further increases in borrowing costs. A more relaxed tone from New York Fed President John Williams, who said there was no urgency for further action, also contributed to the diminished odds of an October rate hike.

The US dollar hovered near a two-month high due to elevated Treasury yields, while the euro remained steady at USD1.1334 after falling 2.5% the previous month. The Japanese yen weakened by 0.3% to 157.95 per dollar after rising by 1.5% in September. Policymakers at the Bank of Japan suggested accelerating the pace of interest rate hikes during their September meeting.

In commodities, as investors assessed the outcome of US-Iran peace talks and the outlook for Middle East crude exports, Brent crude futures were at USD98.15 per barrel, after surging over 14% last month, marking the third consecutive month of gains.