Asia Day Ahead: Japan’s Nikkei eyes record closing high

Asia Open

The Asian session looks set for a slight positive open, with Nikkei +0.40%, ASX +0.00% and KOSPI +0.52% at the time of writing. A push to yet another record closing high in Wall Street may offer some calm for risk sentiments across the region, although risk-taking will still likely be more measured ahead of the Federal Reserve (Fed) Chair’s testimony and the key US inflation release this week. This comes as the US dollar attempts to stabilise overnight after its recent dip, which leaves some wait-and-see in place.

Some weakness in US labour conditions to end last week has raised hopes for an impending Fed’s rate cut as soon as September, with dovish bets raised to price for a 77% probability for a September move (up from the 50% last month).

Thus far, the Nikkei has been resilient, with the index hovering just below its record high (more analysis below). While Japan’s household spending unexpectedly contracted in May, fresh wage data may seem to support the case for some recovery ahead. Expectations are for further normalisation from the Bank of Japan (BoJ) as soon as July, as the wage-prices spiral that policymakers seek are becoming more apparent.

On the other hand, Chinese equities continue to tread in a downbeat state, with the Hang Seng Index (HSI) hitting a new one-month low. China’s inflation numbers for June will be due for release tomorrow, which may drive some caution amid the mixed expectations. Consensus is for consumer prices to increase 0.4% year-on-year, but on a month-on-month basis, prices are expected to contract by 0.1%.

Fed Chair Jerome Powell’s testimony on watch ahead

With the recent US jobs data release, market participants will be watching if higher unemployment rate, which has overshot the Fed’s June projections, will provide the confidence that the Fed Chair seeks to kickstart its rate-easing process. However, with the US inflation data release up later this week, the Fed Chair may still hold off on giving any overly-dovish signal, potentially choosing to gain more clarity from the inflation numbers for now, especially with broad expectations for the core inflation read to remain unchanged at 3.4% year-on-year.

On the radar: Nikkei 225 hovering near record high levels

A 6.4% gain in the Nikkei over the past two weeks has brought the index back near its record high levels, with buyers seeking for a catalyst to push for a record closing. Further consolidation below the 41,160 level may be a bullish sign, which suggests that buyers are absorbing any selling pressures that arises at the key resistance level.

Ahead, any break above the 41,160 level could potentially pave the way towards the 44,000 level based on Fibonacci extension. On the downside, the key psychological 40,000 level may serve as immediate support to hold.