Asia’s pale dawn: Waiting on the US twin inflation dragons

The twin inflation dragons

Asia greets the midweek tape not with fireworks but with a dim glow, and it’s no wonder — the world’s demand engine has sprung a tidal wave of statistical job leaks. Traders across the region look a paler shade of grey as Wall Street clings to fresh highs while the local screens hum flat.

The irony is thick. Despite the gnarly payroll revisions that screamed slowdown, the dollar is firm and U.S. yields are strutting higher — hardly the opening act Asian stock pickers dream of. It sets the stage for hesitation, not conviction. Everyone knows the real headliner comes later this week: CPI and PPI, the twin inflation dragons whose fire could still dictate the Fed’s playbook. Traders aren’t just parsing whether inflation cools; they’re gaming the shape of the curve. That nuance matters because if the data lands soft enough, the market may just push Powell into a September 50-point slash — a policy bazooka that the Fed should’ve already fired months back if they really knew the labour market was cracking.

Even if inflation flares, Waller — heir apparent to Powell — has already signalled tariffs and laggy rent math will be looked through—the former as one off the latter as bad math. Everyone on the desk knows the BLS’ Owner’s Equivalent Rent is the statistical bad actor here — reporting a year late while real rents slide. It’s data theatre, not lived reality. Hence, options markets are pricing in just a .6 % flash move on the big board.

Asia doesn’t trade in a vacuum either. Screens here flicker with geopolitical static: Trump dangling fresh tariffs on China and India as leverage over Russia. His message is clear — join Europe in squeezing Putin or face his own sledgehammer. For exporters in Beijing and Mumbai, it’s a reminder that the tariff overhang never really left the stage.

Even the yen, which briefly flirted with strength, is caught between cross-currents — whispers of a BoJ hike versus the gravity of rising U.S. yields. Political noise in Tokyo matters less than tariff relief out of Washington, and the currency knows it.

So Asia opens subdued, haunted less by what’s known than by what can’t be trusted. Inflation data will either crack open the policy firehose or reveal that the Fed’s compass is still spinning on broken dials. Until then, the region trades in half-light — exporters wary, investors cautious, and every chart tinged with hesitation.

Trader lens: A late-cycle waltz

Markets right now feel like a ballroom at 3 a.m. The chandeliers are still lit, the DJ is still spinning, and the crowd hasn’t noticed that the waiters are stacking chairs at the edge of the room. The Fed has managed to elongate the cycle like a DJ slowing down the vinyl, extending the track well beyond its natural playtime. The fiscal punch bowl is still spiked, but you can already see the cracks in the crystal.

The labour market is the pivot around which this late-cycle waltz spins. On the surface, layoffs are rare, but the more sinister truth is that if you do lose your job, your odds of finding another are the worst on record. That’s not a comfort blanket, it’s a trapdoor. Labour data may be messy, lagging, and prone to revisions, but revisions themselves are pro-cyclical: uglier into recessions, rosier in recoveries. This is why traders obsess over every benchmark tweak; the past gets rewritten, and the future looks brighter amid the ensuing Fed put.

Fiscal space is threadbare. Rising interest costs are devouring room to maneuver, and yet the belief persists that policymakers can still lean against the wind. Inflation running north of 2.5% makes breakevens a cheap form of insurance. Growth policy will almost certainly be dressed up as pro-GDP stimulus, not belt-tightening austerity. Everything that juices nominal GDP flatters the tax take, and that’s the card the administration will play — whatever it takes.

From 2022 through mid-2024, VIX traded like a relic, a ghost wandering the halls. That ghost is now rattling chains again. Credit spreads are widening, correlations are rising, and the low-volatility equilibrium has broken. Markets no longer have the Goldilocks conditions that allow calm. This shift is a regime change: the clock has struck midnight, and vol is back in play.

Positioning remains skewed to the fantasy of endless rate cuts. The reality is less forgiving. A hot CPI print could see the S&P squeeze toward 6,200 before anyone bothers to hedge. A weak one, and suddenly the long bond looks attractive at 4.25%. AI momentum is alive but already over-discounted — this isn’t virgin territory anymore. Tops form slowly, bottoms collapse fast. Right now, we’re consolidating at altitude, marching higher into CPI, but the smarter trade is to be long VIX and short SPX into the number.

The bigger picture is dangerous. Retail has gone all-in, convinced of the Trump “put”, while policymakers are low on ammo. Growth is slowing, jobs are vulnerable, and technicals show a market skating on thinner and thinner ice. Cyclicals and defensives are splitting apart, and the dislocation with TIPS is the widest in years. Ignore that at your peril.

Every cycle follows CRIC: Crisis, Response, Improvement, Complacency. The hard part is diagnosing where we stand. My call? We’ve moved out of improvement and deep into complacency, and the only thing left to debate is how and when the cracks widen into fractures. The market is still the world’s biggest carry trade — but carry works until it doesn’t. For now, the DJ hasn’t cut the lights. But traders know: when the music stops, you don’t want to be the one without a chair.