Editor’s Note
This article discusses how softer-than-expected US inflation data has bolstered market expectations for a Federal Reserve rate cut, contributing to a rally in US equity indices. It also touches on related factors influencing global markets.
The year-on-year increase in the US Consumer Price Index (CPI) for September, announced on October 24, came in at 3.0%, below the market expectation of 3.1%. This solidified expectations for an interest rate cut at the October 28-29 FOMC meeting, serving as a buying catalyst.
On October 27, a buying catalyst for Japanese stocks was the temporary easing of concerns over US-China trade friction, following ministerial-level trade talks held in Malaysia on October 25-26.
Amid very strong movements in both US and Japanese stock markets, the Nikkei 225 Stock Average broke through the 50,000 yen mark on October 27. Although it retreated the next day on the 28th, it maintained its position above 50,000 yen.
Let’s review the market movements over the past few days. In the US, on October 24, the Dow Jones Industrial Average extended gains, rising 472.51 dollars (1.01%) from the previous day to close at 47,207.12 dollars, hitting a new record high for the first time in three days and closing above 47,000 dollars for the first time. The Nasdaq Composite Index also rose, gaining 263.07 points (1.14%) to close at 23,204.87 points, marking its highest close in about two weeks. The S&P 500 Index also advanced, rising 53.25 points (0.79%) to close at 6,791.69 points, also setting a new record closing high.
It has also been noted that Fed Chair Powell might comment on the timing of the end of Quantitative Tightening (QT) during his press conference after the October 29 FOMC meeting, which can also be considered part of the market consensus.
Following the US stock rally on October 24, the Nikkei 225 opened the week on the 27th, closing at 50,512.32 yen, up 1,212.67 yen (2.46%) from the previous weekend, marking the first-ever close above 50,000 yen. The TOPIX also hit a new high, closing at 3,325.05 points, up 55.60 points (1.70%) from the previous weekend.
The primary drivers were the consistently high approval ratings for the Takachi cabinet in various media polls and the receding concerns over an escalation in US-China tensions.
Regarding US-China issues, US Treasury Secretary Bessent stated in an interview with CBS News that President Trump’s warning of 100% tariffs on Chinese goods was “effectively withdrawn.” Furthermore, she indicated that China is expected to make large-scale purchases of soybeans and delay the implementation of comprehensive regulations on rare earths. This “Bessent statement” strengthened risk-on sentiment, leading to a broad rally in the Tokyo stock market.
US stock markets also showed strong momentum at the start of the week on October 27. The Dow extended gains for a third day, closing up 337.47 dollars (0.71%) from the previous weekend at 47,544.59 dollars, setting another record high. The Nasdaq Composite also rose for a third day, gaining 432.59 points (1.86%) to close at 23,637.46 points, a new high. The S&P 500 also advanced for a third day, rising 83.47 points (1.22%) to close at 6,875.16 points, marking a second consecutive trading day at a record high.
The Philadelphia Semiconductor Index (SOX) also closed above 7,000 points for the first time, rising 191.04 points (2.73%) to 7,167.98 points, indicating tech stocks, particularly semiconductors, led the market higher. In the US, the start of earnings season for major companies, with expectations of strong results, is also supporting the market.
On the following day, October 28, the Nikkei 225 fell 293.14 yen (0.58%) from the previous day to close at 50,219.18 yen but maintained its position above 50,000 yen. Technically, it remains above its 5-day moving average (49,596.11 yen as of Oct 28), 25-day moving average (47,385.17 yen), and 75-day moving average (43,839.62 yen). Therefore, a short- and medium-term uptrend is recognized as being in place.
Similarly, TOPIX fell 39.18 points (1.18%) to close at 3,285.87 points but remains above its 5-day (3,280.12 points), 25-day (3,200.86 points), and 75-day (3,076.90 points) moving averages. Thus, TOPIX is also technically in a short- and medium-term uptrend, similar to the Nikkei.
In her first policy speech at the House of Representatives on October 24, Prime Minister Takachi strongly outlined a policy of strategic fiscal spending under the concept of “responsible proactive fiscal policy” to build a “strong economy.”
She also stated the goal to raise defense spending to 2% of GDP would be achieved within fiscal year 2025, two years ahead of schedule. Anticipating further increases in defense-related spending, she indicated plans to bring forward the revision of the three key security documents (National Security Strategy, National Defense Strategy, Defense Buildup Plan) next year. Therefore, “Defense” is expected to be a long-term investment theme.
Regarding growth strategy, she announced policies to draw active public and private investment by implementing comprehensive support measures from multiple perspectives for strategic sectors such as “AI/Semiconductors,” “Shipbuilding,” “Quantum,” “Bio,” “Aviation/Space,” and “Cybersecurity.”
To fundamentally strengthen disaster prevention systems, preparations will be accelerated for the establishment of a “Disaster Prevention Agency” in the next fiscal year.
Furthermore, she stated that by utilizing digital technology, satellite information, electromagnetic waves, drones, etc., thorough “pre-disaster prevention and preventive maintenance” will be implemented in both hardware and software aspects, including the development and preservation of disaster prevention infrastructure and aging infrastructure. Naturally, stocks aligned with these themes are expected to continue attracting investment.
By the way, on October 27, US Commerce Secretary Ratonic stated in an exclusive interview with Nikkei that the agreed $550 billion (approx. ¥84 trillion) US investment framework with Japan is “an investment in national projects, and Japan’s risk of loss will be zero.”
Ahead of the full-scale earnings season, it is advisable to avoid holding stocks over their earnings announcement dates (‘crossing earnings’) and instead focus on targeting profits from “Takachi stocks” that have already safely cleared their earnings reports.