Asia Day Ahead: Dovish Fed rate bets mount, Nikkei eyes retest of March 2024 high

Asia Open

The Asian session looks set for a positive open, with Nikkei +0.49%, ASX +1.06% and KOSPI +0.80% at the time of writing. Weaker Treasury yields and a dip in the US dollar (-0.3%) on dovish rate bets may be supportive of risk sentiments across the region, although risk-taking may be capped as we head into the US Independence Day holiday, which may drive thinner volume.

Weaker-than-expected US jobless claims data and services Purchasing Managers' Index (PMI) were the highlights overnight, with slowing US growth prospects once again leaving a September rate cut more likely than not. The odds for a September cut are now priced at 68% versus the 63% prior.

Restrictive monetary policies are clearly having a softening impact on the economy, which may raise calls for the Federal Reserve (Fed) to shift more focus towards supporting growth conditions ahead. At a glance, the US services PMI came in at 48.8 versus the 52.5 expected, with business activities, new orders and employment all dipping into contractionary territory. Services pricing pressures cooled slightly more than expected, although further progress is surely needed to offer reassurances for policymakers that inflation is returning to target.

The Nikkei has extended its gains for the third straight day, lifted by an outperformance in the tech sector overnight while market participants continue to perceive recent authorities’ comments on yen moves as mere jawboning. The Hang Seng Index (HSI) managed to regain some ground lately, but overall sentiments appear cautious with the mixed run of economic data lately.

US non-farm payrolls on watch next

The US non-farm payrolls will be on watch this Friday to validate the recent run in softer labour conditions. Expectations are for the US economy to add 190,000 jobs and for the unemployment rate to remain stable at 4.0%. Average hourly earnings are expected to fall to 3.9% year-on-year from 4.1% prior.

On the radar: Nikkei setting its sight on March 2024 high

Buyers have been in strong control for the Nikkei, with the index breaking above a near-term rising channel pattern and leaving it just 1.3% away from its March 2024 high. Buyers may seek to retest the level ahead, with its daily relative strength index (RSI) pulling firmly above the mid-line in a reflection of building upside momentum. Near-term support may be found at the 40,350 level, while a break above the 41,200 level could leave the 43,440 level on watch based on Fibonacci extension.