Asian stocks rose, fully recovering their losses from last week’s rout, bolstered by an advance in Japanese shares.

Japan’s equities rose after a holiday, as a weaker yen was seen providing support for exporters. MSCI’s Asia-Pacific gauge rose as much as 1% to erase losses from last week’s tumble. The S&P 500 closed little changed ahead of US inflation data later Tuesday and Wednesday. Treasuries held Monday’s gains.

“Volatility could return this week,” said Solita Marcelli at UBS Global Wealth Management. “If inflation is too low, this may heighten concerns that the US may be heading for a recession. If inflation is too high, it could encourage fears that the Federal Reserve may be unable to cut rates quickly enough to protect the economy. Geopolitical risks also remain elevated.”

Oil remained near the $80 level it hit on Monday, as the US sees an Iranian attack against Israel as increasingly likely. Israel’s sovereign debt was cut by one notch by Fitch Ratings, which kept a negative outlook on the credit as continued military conflict weighs on the country’s public finances.

Both the Nikkei 225 and the Topix are down more than 8% since the end of July, when the Bank of Japan raised its benchmark interest rate and unveiled plans to reduce its bond purchases. The benchmarks slid into a bear market on Aug. 5, when losses exceeded 20%.

After last week’s turmoil, markets will be focused on Wednesday’s US consumer price index to see if the Fed will have a freer or more constrained hand in refocusing on the labour market and front-loading rate cuts sufficiently to secure a soft landing, according to Krishna Guha at Evercore.

“Do not panic if CPI is on the hotter side,” Guha noted. “This is now a labor-data first Fed, not an inflation-data first Fed — that is less data-point dependent, more forward-looking. We think if coming labour data stays soft, the Fed will still be forward-leaning on cuts.”

Elsewhere in Asia, regulators told commercial banks in China’s Jiangxi province not to settle their purchases of government bonds, taking some of the most extreme measures yet to cool a market rally that has alarmed Beijing. At least four Chinese brokerages have started fresh measures to cut back trading of domestic debt beginning last week, people familiar with the matter said.

Risk-Reward

The risk-reward for stock markets remains mixed over the summer months against the backdrop of weakening business activity and negative earnings revisions, according to JPMorgan Chase & Co. strategists led by Mislav Matejka.

“Fed will start cutting, but this might not drive a sustained leg higher, as the cuts might be seen as reactive, and behind the curve,” they wrote.

Investors will have a brief window to buy the dip in US stocks at the end of this month as selling pressure from systematic funds eases while companies boost share buybacks, according to Scott Rubner at Goldman Sachs Group Inc.

More near-term dips can’t be excluded if activity data surprise negatively, but investors should buy stocks on weakness as fundamentals are still supportive of risk assets, HSBC strategists say.