Asia open: Oil price drop gives the Fed plenty to chew on

The oil price slide is grabbing attention as investors look ahead to Wednesday’s U.S. consumer price inflation figures—the last significant economic data point before the Fed's interest rate decision next week.

The big question is whether these price declines should be read as a sign of doom and gloom. One thing’s for sure: the Fed might want to take a closer look at the collapse in oil prices. It’s a clear sign of disinflationary pressures building in the system. Yes, oil can be unpredictable, but that volatility could be the perfect justification for a 50-basis-point cut. With 10-year breakevens now at 2.03%—the lowest since January 2021—the case for a more aggressive easing cycle is hard to ignore

Weak global demand and sluggish economic activity are warning signs for riskier assets. If the global economy continues decelerating, investors could soon hit the brakes, pulling back from high-risk markets. Throw in another round of grim data from China, and it's no wonder that caution is fast becoming the strategy du jour.

On Tuesday, China’s year-on-year import growth limped in at a meagre 0.5% for August, a dismal number that overshadowed the relatively brighter news of export growth reaching a 1.5-year high. But let’s not kid ourselves—this is far from a turnaround story.

Meanwhile, oil is in a tailspin. Brent crude nosedived 3.7%, and U.S. futures tumbled 4.3%, logging their lowest daily close since December 2021. Both benchmarks are now over 25% lower than last year, while U.S. gasoline prices are down a jaw-dropping 30%. These moves scream disinflation, and if they hold, expect next year’s inflation readings to take a nosedive along with them.

In short, the Fed has a lot to chew on as it heads into its September decision, with oil’s freefall providing plenty of food for thought.