Asian stocks slip and bond yields stay high after a bruising September

Asian stocks were subdued on Thursday and global bonds remained under pressure after a brutal September, as investors weighed a smaller-than-expected rise in US inflation in August that lessened the probability of a rate rise later this month. MSCI's broadest index of Asia-Pacific shares outside Japan fell 0.2% and South Korea's KOSPI eased 0.14%, while Japan's Nikkei rose more than 1% as chip-related shares gained. Futures for the Nasdaq and S&P 500 were up 0.3%, and European stock futures slid 0.75% in early trading. Blockbuster earnings from AI chipmaker Micron did not lift the mood in Asia.

Data released on Wednesday showed US inflation increased less than expected in August, and that price pressures in the prior month were more moderate than previously reported. Traders now price a 38% chance of a Federal Reserve rate hike this month, down from 50% a day earlier, according to CME's FedWatch tool. The odds were also reduced by comments from New York Fed President John Williams, who said on Tuesday that he saw no urgency for further action.

Bond yields surged in September as prices tumbled, with soaring energy costs sparking inflation fears and the AI boom boosting economic growth, leaving investors braced for a period in which interest rates stay higher for longer. The yield on benchmark US 10-year Treasury notes hit 5.306%, the highest level since mid-June 2007, while the 30-year Treasury yield was at 5.634% after hitting 5.6517% in the previous session, its highest since June 2002. Darren Shames, global head of rates sales at Nomura, said the US had surpassed $40 trillion of debt and the fiscal situation showed no sign of improving, so 5% alone did not say much in absolute terms, especially in a historical context. What was really getting the attention of investors, he said, was the trajectory and velocity of the rate move.

"Micron's numbers are another strong validation of AI and memory demand, but markets may increasingly be asking whether we are closer to peak memory shortage, even if demand continues to exceed supply," said Charu Chanana, chief investment strategist at Saxo. "The macro backdrop is also becoming more mixed. Softer US data has taken some pressure off Fed expectations and shorter-term yields, but long-term yields remain high, so the cost-of-capital concern has not really gone away," she said.

The US dollar stood firm near a two-month high, supported by elevated Treasury yields. The euro was steady at $1.1334 after dropping 2.5% last month, while the Japanese yen was 0.3% softer at 157.95 per dollar after rising 1.5% in September. A summary of opinions from the Bank of Japan's September meeting, released on Thursday, showed some policymakers saw a need to accelerate the pace of interest rate hikes. In commodities, Brent crude futures were at $98.15 a barrel after surging more than 14% last month, a third straight month of gains, with stalling peace talks between the US and Iran to end the seven-month-long war in the Middle East keeping oil prices elevated.