Surprise decline in US PPI spurs risk-on: DJIA, Straits Times Index, US dollar

Market Recap

A surprise decline in US producer prices and higher-than-expected jobless claims further allow the Federal Reserve (Fed) to head towards an impending rate pause and support risk-on sentiments overnight. It is the first month-on-month contraction in US core producer price index since June 2020 (-0.1% versus 0.3% forecast), providing testament that tighter policy responses are working through the economy.

Almost all S&P 500 sectors closed with gains (except real estate), with outperformance concentrated around big tech companies. These firms are able to gain more traction from their growth nature on potentially lower rates ahead, while deemed to be relatively more resilient to economic downturns. The VIX fell to its two-month low, pushing further below the key 20.00 level (risk-on environment).

Well-anchored rate expectations drove gold prices to its 13-month high while the US dollar is back to retest its 2023 low. On the other hand, Brent crude struggled to move higher overnight (-1.1%) as a challenging oil demand outlook keeps sentiments in check.

All eyes will be on major US banks’ earnings tonight (JPM, WFC, Citigroup), which will provide a first glimpse of financial profits amid recent banking jitters and a slowing economy. That may leave the DJIA on watch, with the index heading back to retest its 2023 tops at the 34,400 level. Multiple retests of key resistance may exhaust the supply of sellers at that level and raise the odds of an upward breakout. Any move above the 34,400 level could pave the way for the index to retest its March and April 2022 high.

Asia Open

Asian stocks look set for a positive open, with Nikkei +1.23%, ASX +0.07% and KOSPI +0.30% at the time of writing (8.30am SGT). Gains in Wall Street may provide a positive backdrop for the region, but with some wait-and-see sentiments ahead of major US banks’ earnings. Singapore’s central bank has kept its monetary policy settings unchanged at its April meeting, as three consecutive months of lower-than-expected inflation provide some conviction that tighter policies have been working through to the economy.

However, that comes at the expense of higher growth risks with Singapore’s GDP growth projected to be below trend this year and the ‘domestic economic slowdown could be deeper than anticipated’. The worst-is-over in its export sector is not sighted yet, with four straight months of decline and February this year revealing its worst non-oil domestic exports decline in a decade.

The STRAITS is back to retest a key resistance level at the 3,320 level. Any break above the level may leave the February 2023 high on watch. That said, outflows from institutional investors for the 8th consecutive week continue to put some doubts on more sustained upside. Institutions have been paring their exposure from the financial sector since the start of this year, with the sector accounting for more than 45% of the index’s weightage. Near term, sentiments will revolve around the upcoming US banks’ earnings releases as a key driver.

On the watchlist: US dollar heading back towards 2023 low

The lack of a hawkish recalibration in rate expectations continue to weigh on the US dollar, which is back to retest its 2023 low. The formation of a new lower low reinforces its ongoing downward bias, with the bears rejecting the formation of a bullish crossover on moving average convergence/divergence (MACD). Thus far, the US dollar's aggregate positioning against G10 currencies has remained in net-short territory since November 2022, with the trend likely to continue ahead without the validation of a hawkish Fed. A break below the 101.30 level yesterday may place the 99.00 level on watch next.

Thursday: DJIA +1.14%; S&P 500 +1.33%; Nasdaq +1.99%, DAX +0.16%, FTSE +0.24%