Asia Day Ahead: All eyes on US CPI, US tariffs

Asia Open

The Asian session was set for a positive open, with Nikkei +1.13%, ASX +0.68% and NZX -0.23% at the time of writing. Hong Kong and South Korea markets are closed for holiday. A late-night bounce in Wall Street overnight aided to put major US indices firmly in the green as market participants look towards the upcoming US consumer price index (CPI) for any follow-through of a retest of their respective all-time highs.

The US dollar reacted lower (-0.2%) to the US April producer price index (PPI), taking its cue from lower US Treasury yields as the narrative for impending rate cuts stays unchanged. Federal Reserve (Fed) Chair Jerome Powell’s comments also offered little surprise, sticking to his script of data-dependence but reiterated that additional rate hikes remain off the table. A weaker US dollar and lower US bond yields may translate to some relief for risk sentiments across the region.

Perhaps more shake-up may occur in Chinese equities, with earnings from Tencent and Alibaba presenting a divergence. Eyes are also on US-China relationship, with the confirmation of tariffs on US$18 billion of selected Chinese imports. Key things to watch ahead will be the scale of China’s retaliation, which will be key in determining where US-China ties are headed. The US tariffs also comes a few months before the US election, so in a way, it may carry some political agenda to show a tough stance on China. If it does, then the question remains on whether we will see more restrictive trade measures coming in as the US election nears.

Look-ahead: US CPI

The release of US April producer prices yesterday was looked upon as a precursor for the US CPI data ahead. While there is a huge upside surprise in the month-on-month reading (0.5% MoM versus 0.3% consensus), a downward revision to the March reading (-0.1% versus 0.2% prior) may quell concerns about inflation being overblown and as what the Fed Chair had described, the PPI data was ‘mixed’.

Ahead, US headline CPI is expected to come in at 3.4% year-on-year, down from the previous 3.5%, while core consumer prices are expected to come in at 3.6% year-on-year, down from the previous 3.8%. Further inflation progress could likely anchor current market expectations for the rate-cutting process to kickstart in September this year.

What to watch: US dollar on watch for US CPI

With the looming US CPI data, the US dollar has struggled to cross above its 105.30 resistance so far. A near-term break of an upward trendline, along with a reversion in its daily relative strength index (RSI) back below the key 50 level, seems to put sellers in control for now. Should the US inflation reveal promising inflation progress and support earlier rate cuts for the Fed, we may see the US dollar retrace towards the 104.00 level, where the lower edge of its daily Ichimoku Cloud support stands.

What to watch: Nikkei 225 still on a bearish flag formation?

While the Nikkei has recovered close to 6% from its April 2024 low, resistance is presented at the 38,400 level for now, while one may argue that a bearish flag formation could still be in place. Confirmation will be sought for any breakdown of the flag below the 38,000 level, which may unlock fresh selling pressures towards the 36,600 level, followed by the 34,000 level. For now, its daily RSI continues to hover around the mid-point, giving a more balanced stance. But with a failed attempt to reclaim the 50 level back in early-May, further struggle to head above the mid-point may leave sellers in control.