Asia Day Ahead: Countdown to US CPI data, Nikkei extends run to decades high

Market Recap

Wall Street started the new trading week on a mixed tone, as a series of late-night selling on increased volume seems to reflect some de-risking ahead of the key US consumer price index (CPI) release. Given the relentless risk rally over the past months pricing for impending rate cuts from the Federal Reserve (Fed), there seems to be little room for error when it comes to the US inflation numbers. Ahead, expectations are for the US headline inflation to come in at 2.9% year-on-year versus the previous 3.4%, while the core aspect may further ease to 3.7% from the previous 3.9%.

The strong run in US economic data lately has kept US policymakers to their cautious stance, with a common echo that they are in no rush to cut rates. With that, markets will be seeking further inflation progress to justify their more dovish pricing of five rate cuts through 2024, compared to the three cuts guided by the Fed.

For now, the S&P 500 (-0.09%) continues to hover above its 5,000 level, while the Nasdaq (-0.3%) saw some slight profit-taking overnight as Treasury yields hang around its two-month high. Outperformance was presented in the small caps over the past week, with the Russell 2000 extending its gains by another 1.9% overnight. Having traded within a broad ranging pattern since May 2022, recent upmove has marked another attempt to reclaim its key 2,000 level after finding support at a 38.2% Fibonacci retracement. The December 2023 high is set in sight for a retest, with any successful break potentially leaving the 2,140 level on watch next.

Asia Open

Asian stocks look set for a positive open, with Nikkei +1.94%, ASX -0.11% and KOSPI +1.12% at the time of writing. The Nikkei continues to keep up with its positive momentum to fresh decades high, while the ASX remains stuck in a breather following a touch of new record early in the month. Markets remain closed in mainland China, Hong Kong and Taiwan for the Lunar New Year holiday, which may offer Chinese equities room for some respite following a weak start to the year.

The economic calendar today saw a subdued read in Japan’s producer price index (PPI), with a 0.2% increase from a year ago while flat on a month-on-month basis. While the year-on-year number is slightly higher than the 0.1% expected, the tame number may still suggest limited pass-through to consumer prices and may offer room for the Bank of Japan (BoJ) to keep to its wait-and-see for now. Market expectations have been pricing for rate hike to come only in April 2024, and economic data thus far seems to be supportive of such timeline.

Firmer US Treasury yields have led the USD/JPY to its two-month high, with the pair pushing past various resistance (Ichimoku cloud, 100-day and 200-day moving average (MA)) to reflect buyers in control for now. Its relative strength index (RSI) on the daily chart has been trading above the 50 level as a sign of near-term upward bias, as the pair inches towards the key 150.00 level once more, where the BoJ intervened with yen-buying back in October 2022. On the downside, an upward trendline may leave the 148.60 level on watch as immediate support to hold.

On the watchlist: AUD/USD continues to flirt with head-and-shoulder neckline

The AUD/USD has been trading on a head-and-shoulder formation since November 2023, with buyers attempting to defend the neckline at the 0.652 level following a slight hawkish takeaway from the recent Reserve Bank of Australia (RBA) meeting. In the meeting, the central bank kept to its tightening bias, leaving the door open for additional hikes on a broadly data-dependent stance.

Ahead of the key US CPI data release today, the AUD/USD remains stuck in a near-term consolidation for now. Failure to defend the 0.652 level over coming days may pave the way towards the 0.635 level, while on the upside, both its 100-day and 200-day MA currently serve as key resistance trendlines to overcome.

Friday: DJIA +0.33%; S&P 500 -0.09%; Nasdaq -0.30%, DAX +0.65%, FTSE +0.01%