Asia week ahead: Trade tensions, US CPI, China data

Lingering themes for markets

Fed’s dovish pivot
It had been a pivotal week for the Federal Reserve amid the ebb and flow of trade tensions in the week. Following Federal Reserve St. Louis president James Bullard’s comments on Monday stating that ‘a downward policy rate adjustment may be warranted soon’ to provide insurance, we have also heard from Fed chair Jerome Powell shift his staunch patient stance to stating that the central bank can ‘act as appropriate to sustain the expansion’. For markets that had been bogged down to a large extent by the recent eruption of trade tensions and holding out for an approximate two 25 basis points Fed rate cut by year-end, this pivot had certainly lit a fire under the markets. That said, as Chicago Fed president Charles Evans pushback against the idea of an imminent rate cut outlined, further monitoring of data evidence may still be required here.

Trade tensions
Meanwhile on trade tensions, we have seen the lightening up of the mood into the end of the week as hopes for a delay to the June 10 tariffs on Mexican imports to the US and talks between Presidents of the US and China at the G20 carried markets. That said, seeing from the experience with the US-China trade tussle thus far and suggestions that President Donald Trump is looking past the market performance, it may still be too early to expect that it will be all clear from here even for the US-Mexico issue. China’s central bank governor in an interview with Bloomberg had also suggested that the country has lots of policy room should trade war worsen, showing the tolerance here for further deterioration.

Equity markets and risk-assets had nevertheless recovered with the abovementioned anticipation of Fed support and the improvement in risk sentiment into Friday. The S&P 500 index had notably reclaimed the 2800 level to trade above its 100-day moving average as of Thursday, while USD/JPY (大口） pushed off the key $108 support into Friday. While a lack of central bank meetings is anticipated after the RBI and ECB arrived supportive this week, watch the series of data particularly out of the US and China in the coming week for clues relating to the direction in which the abovementioned lingering themes of Fed and trade tensions could go.

US CPI data

With the Fed’s pivot, expect each piece of economic data to be scrutinized more closely as puzzle pieces forming the picture on when the Fed could be moving next. We have yet to see May’s labour market update in the US at the point of writing, whereupon any significant disappointment in alignment with the ADP reading could trigger the Fed mandate of maximizing employment to consider a near-term shift.

Meanwhile moving into the new week, look to the string of data including May’s CPI reading, retail sales, industrial production and the preliminary June University of Michigan sentiment. The market is currently looking to a slight acceleration in the core CPI to 0.2% month-on-month (MoM), one to watch. Retail sales and industrial production are still expected to remain resilient in the month of May, but the preliminary June reading of the UoM sentiment may be one to reflect the impact of the on-going trade woes.

Asia indicators

For Asia markets, track the series of updates from China which could see surprises ripple through to the region. May’s trade numbers will be released at the start of the week with both exports and imports expected to deteriorate to reflect the softening in external conditions. Likewise with the factory gate prices, though Friday’s retail sales number could remain resilient according to the current market consensus.