Upcoming US CPI viewed as catalyst for any high-volume breakout in the S&P 500

Market Recap

Some paring back of risk positions ahead of the key US Consumer Price Index (CPI) release and a series of downbeat tone on the macroeconomic front have kept US equity markets under pressure, with the major indices giving back some of its previous days’ gains. Overnight, the growing risks of stagflation were brought to the forefront with warnings from the World Bank’s latest economic projections, further reinforced with some comments from Treasury Secretary Janet Yellen. To recall, the World Bank has slashed its global growth forecast for 2022 to 2.9%, down from 2021’s 5.7%, while Janet Yellen warned of a long period of inflation in the US. The Atlanta Fed’s GDPNow tracker also points to an annualized gain in the US gross domestic product (GDP) of 0.9% for the second quarter, a downward revision from an estimated 1.3% increase less than a week ago. This may place any further decline in the reading over the coming weeks on watch, with any dip into negative territory potentially refuelling talks of recession, coming after the contraction of 1.5% in the first quarter.

The US Treasury yields were broadly higher overnight, with the US 10-year reclaiming back above the 3% territory, which potentially reflects some positioning for a hawkish tilt in policy outlook with the lead-up to the upcoming US CPI data. For the S&P 500, the index is still broadly trading in a holding pattern, with the formation of a bullish pennant keeping some hopes of a continuation in the relief rally alive. With that, the index is coming close to the end of the symmetrical triangle and the US inflation reading will be clearly looked upon as a catalyst to induce a high-volume breakout out of the pattern.

Asia Open

Asian stocks look set for a cautious open, with Nikkei +0.18%, ASX -0.77% and KOSPI -0.58% at the time of writing. The largely indecisive moves in Wall Street over the past few days with the lead-up to the US inflation data may drive some wait-and-see in the region for now. Some signs of resilience were presented in the Nasdaq Golden Dragon China Index, with the index holding on to its 5.7% gains overnight, riding on increased optimism from the regulatory front with recent government’s game approvals. On the monthly chart, the index seems to be following through with a bullish hammer candlestick last month, with the overnight move retesting its three-month high. While sentiments have improved, any relief in Wall Street ahead will be looked upon as a catalyst for a continuation in positive momentum into next week. For now, some paring down of risks ahead of US CPI may take place, with overall market mood leaning towards some cautiousness today. Overnight, Intel’s warning of a weaker performance may also place some downward pressure on chipmakers in the Asia region today as well, having driven a -2.4% performance in the PHLX Semiconductor Index.

The economic data in focus for the Asia region today may be China’s trade balance data. A rebound in trade activities is expected, with consensus for exports to come in at a 7.6% growth year-on-year (YoY), up from 3.9% in April. Import is also projected to deliver higher growth of 2.3%. Trade balance could improve from a relatively low base from the previous year, but the pickup in trade activities could continue to face production and deliveries headwinds in May, which has a limiting impact on growth. With the shift towards normalcy in June, trade activities in China could normalise over the coming months, providing a more accurate picture of external global demand and supply constraints on production, along with pent-up domestic consumption.

For the Australia 200 index, a pattern of declining volume of a rising wedge was met with a break lower, potentially a sign of bearish pressure. This may prompt a move to retest the 6,930 level next as near-term support, where the base of a longer-term consolidation pattern for the index since May last year was in place.

On the watchlist: EUR/USD retesting upper channel trendline with ECB policy meeting and US CPI data on watch

Ahead of the European Central Bank (ECB) policy meeting and US CPI data, the EUR/USD has been largely trading in consolidation as a sign of market indecision. Current expectations are pointing to an end to ECB’s net asset purchase in June and paving the way for a 25 basis-point hike in the July’s ECB meeting. However, the likelihood of any 50 basis-point increase will be closely monitored by markets, with much to depend on the tone of the ECB press conference. The EUR/USD pair is currently hanging just at the upper trendline of a descending channel pattern, with any hawkish rhetoric from ECB President Christine Lagarde potentially deemed as a catalyst for a near-term breakout. That will leave the 1.077 level as a key line of resistance ahead, while near-term support may be at the 1.052 level.

Wednesday: DJIA -0.81%; S&P 500 -1.08%; Nasdaq -0.73%, DAX -0.76%, FTSE -0.08%