Asia Day Ahead: Dovish Fed rate-cut bets pared, downside surprise in Australia’s employment

Market Recap

A stronger-than-expected US retail sales for December (+0.6% month-on-month versus 0.4% consensus) has led market participants to wonder if they have gotten ahead of themselves in pricing for a March rate cut, with the odds of a March rate-cut shifted to 58% overnight versus 80% from a week ago. The paring of near-term dovish bets led US Treasury yields higher for the second straight day, with the US 10-year yields touching its one-month high above the 4% level, giving market participants an excuse for some profit-taking off Wall Street.

Major US indices ended broadly lower (DJIA -0.25%; S&P 500 -0.56%; Nasdaq -0.59%), although some dip-buying towards the latter half of the trading session suggests that buyers are not prepared to cave in just yet. The US dollar ended the day where it started, failing to sustain its gains despite higher yields as its 200-day moving average (MA) is now standing in the way as key resistance to overcome.

Through the rest of the week, the earnings calendar may remain light, but additional Federal Reserve (Fed) officials’ comments and US consumer sentiment data will remain in focus to move the dial around rate expectations. For now, the DJIA is back to retest its 2023 low at around the 37,200 level. One may argue that a near-term double-top formation is in place, with the 37,200 serving as a key neckline support to hold. Failure to hold may lead the index to retest the 36,400-36,600 level next, where the next support confluence stands.

Asia Open

Asian stocks look set for a mixed open, with Nikkei -0.13%, ASX -0.53% and KOSPI +0.47% at the time of writing. Sentiments in the region largely tracked the downbeat handover from Wall Street, as consumer resilience in the US called for some recalibration in Fed rate expectations, which drove Treasury yields higher as a near-term headwind for risk appetite.

Chinese equities continue to see more shunning from investors, with the Nasdaq Golden Dragon China Index down 2.6% overnight as China’s economic data revealed a challenging growth environment despite the series of stimulus efforts. A break below the 16,000 level for the Hang Seng Index (HSI) unlocked fresh selling yesterday, with the October 2022 low at the 14,600 level on watch for a retest over the coming weeks.

This morning’s economic calendar brought an unexpected contraction in Australia’s employment (-65.1k versus +17.6k consensus), but unemployment rate held steady at 3.9%, partly due to a decline in participation rate. Coming off the back of two previous months of strong read, the latest data may prompt the Reserve Bank of Australia (RBA) for more wait-and-see to establish clarity over the trend of labour conditions ahead.

The mixed readings triggered an initial dip lower for AUD/USD, but dip buyers were quick to jump in to defend the 0.652 level. This is where a support confluence stands with the lower edge of its Ichimoku cloud on the daily chart, along with its 100-day MA. Failure to hold the 0.652 level may potentially pave the way to retest the 0.638 level next.

On the watchlist: Brent crude prices still struggling to find direction

Brent crude prices remain broadly stuck in a range as they has been over the past two weeks, as market participants struggle to weigh mixed demand-supply dynamics with prevailing geopolitical tensions. An unexpected build in US crude stockpiles from the American Petroleum Institute (API) data overnight and still-challenging recovery conditions in China continue to cast a shadow over oil demand outlook, but geopolitical developments are hard to ignore as markets remain wary of the risks of a wider escalation if tensions failed to cool off.

For now, prices have been displaying some indecision, with greater conviction for buyers potentially having to come from a move back above the US$80 mark. On the downside, the bottom of the near-term range at US$76.00 level may be on watch for immediate support to hold.

Wednesday: DJIA -0.25%; S&P 500 -0.56%; Nasdaq -0.59%, DAX -0.84%, FTSE -1.48%