Asia Day Ahead: Hang Seng Index (HSI) heads lower following China’s inflation data

Asia Open

The waiting game begins as markets are expected to tread lightly ahead of the key US inflation data and Federal Reserve (Fed) meeting later today, which will dictate the Fed’s policy path ahead. The opening in Asia has been mixed, with the Nikkei -0.7%, ASX -0.6% and KOSPI +0.4% at the time of writing, reflecting much reservations in place as the US dollar hangs around its near one-month high.

Economic data to digest: China’s inflation data

Fresh cues on China’s recovery picture was presented in its May inflation data this morning. At first glance, the fourth straight month of positive consumer price growth may reflect some stabilisation in domestic demand, but the month-on-month read suggests that recovery is still very much fragile.

Its May consumer prices came in unchanged at 0.3% year-on-year, slightly below the 0.4% forecast. Producer prices have improved to -1.4% from -2.5% prior, and a slight beat of the -1.5% forecast. However, month-on-month, consumer prices contracted 0.1% from previous 0%, which may present an area of concern.

Thus far, the recent run in economic data out of China has been more mixed than reassuring. While a stronger recovery is presented in external demand, but as the inflation data today reinforces, domestic consumption is still trying to regain its footing. That may raise some questions on the degree of policy success so far, while the country’s dependence on external trade relations may also be susceptible to the risks of decoupling.

Any return back to deflation may send a stronger warning sign for its growth and may raise calls for quicker policy support to better achieve its growth target of around 5%. At least for now, 1Q gross domestic product (GDP) has beaten forecast at 5.3% earlier in April, while one may still argue that the latest inflation data offered some price stability though still very much fragile. That may prompt authorities to maintain its policy ammunition at least for now, and to allow more runway in assessing future data.

What to watch: Hang Seng Index (HSI)

The rally in the HSI has seen some fizzling off lately, with the index retracing as much as 8% from its May 2024 peak given a mixed run of economic data. A break above a key downtrend line back in April this year may still be significant, but thus far, a higher-low formation to keep the trend reversal in place is still out of sight.

Immediate support may be at the 17,800 level, where its daily Ichimoku Cloud coincides with a key Fibonacci retracement level. For now, with a dip in its daily relative strength index (RSI) below the mid-line and its daily moving average convergence/divergence (MACD) eyeing a cross into negative territory, we may have to see more strength coming from buyers over and the latest inflation read has clearly not been well-received. Resistance on watch ahead may be at the 18,600 level, where the index was capped previously on at least two occasions.