Asia wrap: Risk appetite runs hot as Fed cut bets flood the tape

Asia woke up in full risk-on mode, riding the coattails of a US session that looked like someone hit the “infinite bid” button after CPI didn’t blow the inflation doors off. The MSCI All Country World Index inched another 0.2% into uncharted territory, a quiet reminder that gravity is a theory, not a law, when traders smell a dovish Fed pivot. From Tokyo to Taipei, the mood was all green — Nikkei printing fresh records, Taiwan inching toward its own summit, and Shanghai touching highs not seen since late 2021.

Under the hood, the CPI read was a mixed cocktail — core prices rising at the fastest clip since January, but goods inflation tame enough to convince the market that tariffs aren’t yet metastasizing into runaway prices. Translation: just hot enough to keep traders’ ears perked, not hot enough to spook them. With that, September’s rate cut odds were marked up to a near 90% probability, and the more adventurous desks are now flirting with a 50bp slash scenario.

In Tokyo, the mood at the bond auction table was less bubbly. The five-year JGB sale saw its weakest bid-to-cover since 2020 — hardly a stampede for low-yield paper — and the yen drifted softer. Dollar traders mostly sat on their hands after Tuesday’s post-CPI drop, waiting for the next catalyst in the form of Friday’s US retail sales print. That number now looms large, the market wondering if Main Street is as chipper as the C-suite earnings calls have sounded.

Meanwhile, in the derivatives pit, SOFR options lit up like a Vegas slot machine. Big premium went into structures paying off on a half-point Fed cut — the sort of bet that turns $5 million into $40 million if Powell & Co. decide to swing the axe deep. Treasuries stayed bid, yields softening in the belly of the curve as asset managers quietly loaded more ultra-long duration while hedge funds pressed shorts in the same space, setting up a classic street-versus-suite standoff.

The bottom line: traders have parked the inflation scare for now, strapped risk back into the driver’s seat, and are running the September cut trade like it’s the only show in town. Whether the Fed obliges with a 25bp polite nod or a 50bp haymaker will be dictated by the next few data prints. Until then, Asia is content to surf the global liquidity wave, even if the reef of reality is somewhere beneath the surface.