Asia Day Ahead: China A50 struggles with weak China’s inflation, while Nikkei extends gains

Market Recap

Disappointment over the pace of disinflation in the US sought to challenge the Wall Street rally, although major US indices managed to eke out a flat close on some dip-buying into the second half of the trading session. Both the headline and core US consumer price index (CPI) surprised slightly on the upside, but market participants were not buying into the stance that the Federal Reserve (Fed) will delay rate cuts because of a single data, while economic risks persist in the economy.

The US economic surprise index has touched its lowest level since May 2023 lately, suggesting that US economic conditions have not been outperforming as much as before. The broader inflation trend still points towards further easing in pricing pressures as well, with the core aspect registering its lowest level since May 2021 at 3.9%.

Treasury yields eventually closed lower for the day, with the two-year yields retesting its December 2023 lows while the 10-year yields dipped back below the 4% level. The US dollar struggled to retain earlier gains, given that expectations for a 25 basis point (bp) cut in March this year did not budge. As a result, gold prices managed to hold up overnight, with buyers defending the US$2,018 level of support and keeping prices above its daily Ichimoku cloud to retain the upward trend. Further upside may see prices set its sight to retest the US$2,074 level of resistance once more.

Asia Open

Asian stocks look set for a mixed open, with Nikkei +0.97%, ASX -0.14% and KOSPI -0.36% at the time of writing. The Nikkei seems to be setting its sight to deliver a five-day winning streak, with its resilience diverging from the subdued performance across the other parts of the region. Lower Treasury yields and the struggle in the US dollar may offer some relief for sentiments, but China’s inflation data may provide somewhat of a dampener for gains.

While consumer prices manage to come in slightly above estimates (-0.3% versus -0.4% forecast), a continued drift in deflationary territory still points to weak domestic demand in the world’s second largest economy and does not offer much conviction for a turnaround just yet. Producer prices contracted 2.7% year-on-year as well, slightly worse than the 2.6% contraction expected. Overall, the data reinforces the view that the accommodative policy environment with central bank’s liquidity injections and more supportive property measures have yet to drive a trend of recovery, which may call for more to be done from authorities into 2024.

The China A50 continues to struggle, with the index trading within a descending channel pattern on lower highs and lower lows as a sign of the prevailing downward trend. A break below its recent December 2023 low around the 11,000 level may see prices edge towards the 10,600 level next, where the lower channel trendline support may come into play. Thus far, signs of a longer-term trend reversal are not sighted yet, with its weekly moving average convergence/divergence (MACD) revealing an ongoing drift lower in negative territory, while the index failed to overcome its weekly Ichimoku cloud resistance since August 2021. On any upside, the 11,600 level may serve as near-term resistance for buyers to overcome.

Thursday: DJIA +0.04%; S&P 500 -0.07%; Nasdaq -0.01%, DAX -0.86%, FTSE -0.98%