Asia Day Ahead: China’s PMI surprise on upside, USD/JPY on watch

Asia Open

The Asian session kickstarted the new week on a more positive note, with Nikkei +0.10% and KOSPI +0.51% at the time of writing, as US equity futures found room for some relief following a tamed inflation read from the US core Personal Consumption Expenditures (PCE) price index last Friday.

The US core PCE, which is closely watched by the Federal Reserve (Fed), came in line with expectations at 2.8% year-on-year. That marked further progress in inflation from the previous 2.9%, with the core read now at its lowest level in almost two years, which may offer some validation for the Fed to kickstart its rate-cutting process sooner rather than later. Month-on-month, both the headline and core readings came in at 0.3%.

Since May 2023, the core PCE has not seen any upside surprises, offering some hopes that the trend may continue ahead. While Fed Chair Jerome Powell still maintained his wait-and-see stance for “more good inflation readings”, the recent run in economic data and the tone from the latest Fed meeting has kept market rate expectations well-anchored for rate cuts into the second half of this year.

Markets in Australia, Hong Kong, New Zealand, France, Germany and the UK remain closed for the Easter holiday, so trading may be lighter to start the week. But with Wall Street eyeing another run for a new record high, that may keep the broader risk-on sentiments going as we head into the second quarter of the year.

Economic data to digest: China’s PMI

The official China’s Purchasing Managers’ Index (PMI) read delivered a positive surprise over the weekend, with the manufacturing PMI reversing into expansionary territory at 50.8 for the first time since September 2022, where expectations were for a contraction of 49.9.

With sentiments towards Chinese equities still trailing behind its US counterparts, the data may offer some relief to policymakers by reflecting more resilient global external demand, but market participants will have to weigh it with more woes in China’s property sector from Country Garden Holdings and China Vanke.

Ahead, eyes will be on whether the rebound in the official PMI read may be mirrored on the upcoming Caixin PMI numbers as well, which has a focus on smaller private companies. Any further upside surprises may reveal pockets of strength in China’s economy, which may pave the way for bearish sentiments to unwind in the near term.

What to watch: USD/JPY on intervention talks

With the USD/JPY back to retest its previous record high around the 152.00 level, talks of intervention have surfaced among policymakers as the pace of yen depreciation has clearly caused some discomfort. Back in 2022, the first intervention comes when the Japanese yen weakened 11% against the greenback in less than two months, and the second intervention comes when it further weakened another 5% against the greenback the next month. Thus far, the USD/JPY has risen by 8% since the start of the year.

A move above the 152.00 level of resistance could signal market doubts on policy intervention, which could pave the way towards the 155.00 level next. For now, the pair has been stuck in a near-term consolidation but the broader upward trend remains. In the event of a retracement, the 148.60 level may offer near-term support, where the upper edge of its daily Ichimoku Cloud stands.