Stocks perk-up but caution reigns ahead of US CPI and US30Y auction

Asian stocks have shifted generally higher today, although there remains an air of caution in the market as market participants eye several days of high impact data. Shares in China, Hong Kong and Japan have all gained, while the 1555-JP has traded slightly, with local shares continuing to tread water after last week’s run to fresh post-pandemic highs, with tech stocks outperformers once again.

The upbeat sentiment in Asia looks as though it’ll rub off slightly on European and US stocks tonight: our prices are indicating a pop in Europe’s major indices, and a very modest climb in Wall Street’s.

Today’s batch of macroeconomic numbers delivered a mixed picture

China’s trade balance figures were the key release, and though they were far from a horrible print, the country’s trade surplus, at $US13b, was shown to have shrunk by more than expected last month. Conversely, the picture remains a bright one for the Australian economy, with NAB Business Confidence showing another strong jump in the confidence and conditions figure, reaffirming the upswing in economic activity locally.

The market reaction to both releases was limited, though the AUD/USD, along with the Yuan, weakened marginally on the soft-ish Chinese trade balance numbers.

Simmering under the surface of everything today remains the markets wariness of tonight’s US CPI numbers. Thanks to a stimulus fuelled resurgence in demand in the US economy, along with oft-cited base effects reflecting last year’s economic capitulation, headline CPI YoY is tipped to come out at a hefty 2.5 per cent.

How the market reacts to the inflation numbers, especially if they exceed forecasts, will be crucial asset market valuations. Though separating noise and signal will be tough, with the markets practically baking in that the Fed will be forced to hike rates to curb surging inflation in the not too distant features, tonight’s numbers will provide an important insight into the potential inflationary pressures that some fear could derail risk assets.

30-year Treasury auction tonight

On top of that inflation number, which may prove to have a heavy baring on risk-free rates, a 30-Year Treasury auction tonight will also be watched closely by market participants amidst fears of stretched asset valuations. As much as it will be about what compensation investors want for possibly higher term premia, the matter of every greater issuance will feed into the narrative tonight around this auction.

As greater US debt supply hits the markets to fund all this fiscal stimulus in the US, there’s the overarching concern private demand may not be strong enough to soak up that extra supply, with speculation it may also be another upward driver on yields.

Of course, the intricacies of the bond market will be of major interest to fixed income wonks. But the knock-on impacts may prove significant to broader financial markets, which have been caught in a start of mild indecision in recent weeks. After a period of consolidation in yields, market participants are looking for new queues about the direction of growth versus value, along with whether the story in FX markets remains about US economic outperformance and a US Dollar revival as yield spreads move in favour of US Treasuries.

Just those two dynamics alone will be meaningful drivers of market trends, on top of the even bigger question of possible policy implication of higher yields.

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