Asia Day Ahead: Weaker US data open door for earlier rate cuts

Asia Open

Into the new trading week, markets in Japan, South Korea and Thailand are closed for holiday, setting the region up for a more tamed start. Nevertheless, market participants have been cheering the weaker-than-expected US jobs report and US services Purchasing Managers' Index (PMI) data to end last week, which helped to calm nerves around stagflation and offered room for the Federal Reserve (Fed) to consider earlier rate cuts.

Following five straight months of upside surprises, the US non-farm report for April finally revealed softness in US labour conditions, which has previously been the cause for reservations in the Fed’s easing process. US services PMI surprised significantly to the downside as well with a dip into contractionary territory (49.4 versus 51.4 prior). As such, the US economic surprise index has turned negative for the first time in almost four months.

The dovish recalibration in rate expectations to lean towards a 25 basis point (bp) cut in September this year has dragged US Treasury yields sharply lower before paring some losses through the day, with the US dollar mirroring the moves in bond yields as well. At one point, the US dollar was down almost 0.8%. That may offer some relief to risk sentiments in the region, with market participants now watching whether the weaker growth conditions will make a trend over coming months.

What to watch: China A50 index touching near-term resistance

The China A50 index is retesting near-term resistance at the 12,800 level in today’s session, with its daily relative strength Index (RSI) at overbought territory, which may call some near-term consolidation following its recent rally. That said, the upward trend may remain intact for now, with the index trading within an ascending channel pattern. Any near-term retracement may leave the 12,372 level on watch as support to hold, while on the upside, a push above the 12,800 level may leave the 13,200 level on watch next.