Some holding sentiments ahead of US retail sales and FOMC minutes today: S&P 500, Japan 225, NZD/USD

Market Recap

Major US indices have been inching higher this week, but the extent of gains has not been as robust as previous weeks. This may suggest that the peak-inflation narrative could have been largely priced with the 16% up-move in the S&P 500 and new catalysts are being sought to drive further upside. Overnight, earnings outperformance from Walmart and Home Depot drove the 0.7% up-move in the Dow Jones Industrial Average (DJIA). Walmart forecast a smaller drop in full-year profit as mid-to-higher income consumers turn to Walmart for their groceries, while Home Depot surpassed estimates for quarterly sales. Both suggested that retailers’ earnings are holding up better-than-expected. On the flipside, a tick higher in US Treasury yields weighs slightly on the rate-sensitive Nasdaq.

On the economic data front, US housing starts fell to its lowest level since February 2021 at a 9.6% contraction from the previous month, but the strong ramp-up in July factory output (0.6% month-on month versus 0.3% expected) still point towards a robust economy. The Federal Reserve (Fed) rate hike path is likely to remain undeterred with 125 basis-point (bp) increases being priced through the rest of the year.

Yesterday’s uptick in the S&P 500 has brought the index right at its 200-day moving average (MA), which could be a make-or-break moment as the index has not traded past that line since mid-April this year. The US retail sales and Federal Open Market Committee (FOMC) minutes release will be on watch today. Expectations are for a muted 0.1% growth in July retail sales from June. A more lukewarm growth figure may be preferred by market bulls, considering that a significant deviation away from consensus on the upside could renew concerns about more aggressive tightening from the Fed, while a significant underperformance could fuel growth fears. On the other hand, the FOMC minutes will provide a glimpse of policymakers’ views, with any willingness for smaller rate hikes on watch.

Asia Open

Asian stocks look set for a flat to positive open, with Nikkei +0.88%, ASX +0.01% and KOSPI +0.18% at the time of writing. Economic data this morning revealed better-than-expected business confidence in Japan’s manufacturers, with the sentiment index at a reading of +13 versus +9 in July. Economic reopening continues to provide a positive impact on Japan’s economy, with pent-up consumer spending driving demand. For the Japan 225, a decisive break above the 28,400 level seems to be driving a retest of the 29,300 level next. Some resistance could be expected at the 76.4% Fibonacci retracement level, but overall upward bias may remain with one to watch for a formation of a new lower low.

On the other hand, China’s premier Li Keqiang acknowledged the “more-than-expected” downward pressure from Covid-19 lockdowns in the second quarter and asked local officials to help boost consumption and offer more fiscal support. This seems to be a reaction to China’s recent July economic data, which all turned in lower than expected and pointed to the struggle for growth in its economy. The guidance from the premier may provide some support for sentiments into today’s session but upside will likely remain capped due to the uncertainty of whether growth can eventually be lifted, as we head into coming months of potentially lower trade activities. Hang Seng Tech index could remain fairly muted, riding on the Tencent’s divestment of stakes in Meituan which dragged the index lower by more than 3% yesterday.

Aside, Singapore’s non-oil domestic exports came with a positive surprise with a 7% year-on-year (YoY) expansion compared to the 6% expected. However, June's growth was revised down to 8.5% from previous 9%, and July growth of 7% still marked a slowdown in exports as shipments of non-electronic products weigh. Further test of trade resilience could likely be on the cards as global economic conditions moderate further over the coming months.

On the watchlist: NZD/USD nearing channel trendline support ahead of RBNZ interest rate decision

After breaking above a descending wedge pattern since late-July, the NZD/USD has been trading with a near-term upward bias on a series of higher highs and higher lows. The Reserve Bank of New Zealand (RBNZ) interest rate decision will be in focus today. Its hiking path is expected to continue with another 50 bp rate hike as its consumer prices hit 7.3% in June, the highest rate since 1990. With that being largely priced, a no-surprise from the central bank could drive NZD/USD to track moves in the commodities space and US dollar instead, which have translated to some headwinds for the pair lately. The 0.630 level will be on watch, where a channel trendline support is in place. The pair may have to hold above this level to form a new higher low in order to reinforce the current upward bias.

Tuesday: DJIA +0.71%; S&P 500 +0.19%; Nasdaq -0.19%, DAX +0.68%, FTSE +0.36%