Asia Day Ahead: China’s inflation data on watch, political woes in South Korea drag on

Asia Open

The Asian session is off to a slow start, with the Nikkei +0.19%, ASX -0.29% and the KOSPI -1.37% at the time of writing. Strength in Wall Street to end last week has not been broad-based, with only four sectors closing in the green, but that did not stop the Nasdaq and S&P 500 from edging to yet another record high. The heavy-lifting was concentrated around a handful of tech stocks, notably with Tesla and Broadcom up 5.3%, while Amazon and Meta were up 2.9% and 2.4% respectively. However, the struggle for value sectors to see any notable gains may leave Asian indices on a more subdued note.

The key highlight to digest was the US November non-farm payrolls, which seems to offer something for everyone. A surprise upside in US job addition, along with upward revisions to previous read, will validate the resilience in the US labour market. US wage growth was higher than expected as well at 0.4% increase month-on-month, which should continue to offer a healthy consumer backdrop for a potential soft landing.

The US unemployment rate was a tad higher at 4.2%, which is not too overblown to trigger recession fears, while an edge closer towards the Federal Reserve (Fed)’s year-end projection of 4.4% should give policymakers some reassurances in following through with a 25 basis point (bp) cut this month. The increased certainty around further Fed’s easing ahead should keep risk sentiments well-supported and we may expect somewhat of a drift higher in the lead-up to the Fed meeting next week.

China’s inflation data on watch ahead

Today, all eyes will be on China’s inflation data. November consumer prices are expected to tick up slightly to 0.4% from 0.3% previously, while producer prices are projected to improve marginally to -2.8% from -2.9%. These readings may signal some near-term stabilisation, potentially reflecting modest success from recent economic stimulus measures. However, the still-subdued pace of price recovery may continue to underscore weak domestic demand as well, with households and businesses remaining cautious against an uneven economic backdrop. Concerns around deflation risks are unlikely to dissipate without more substantial progress.

Chinese equities did see some signs of life last week, with a Friday rally bringing the Hang Seng Index (HSI) to end the week up 2.3%. There are likely some optimism mounting around the upcoming annual Central Economic Work Conference this week, which will be on watch to offer more colours on how policymakers may tackle the economic challenges into next year. Focus will be on any ramp-up in tone around upcoming policy measures and more clarity over the scale or areas of any fresh economic injections. Sticking to its usual vague script and having little new colours on any concrete measures ahead may be a source of market disappointment, which could potentially see some gains in Chinese equities unwind.

South Korea’s political woes to persist as well

Political uncertainty in South Korea appears likely to persist. While ruling party lawmakers have backed their leadership to stave off impeachment efforts for now, this is unlikely to mark the end of the challenges facing President Yoon. Growing public outcries and intensifying pressure from the opposition party could potentially increase the risk of defections among People Power Party (PPP) members, which could drive further resistance to his leadership in the coming weeks.

The ongoing political deadlock diminishes the chances that any meaningful policies will be passed in the near term, which may continue to dampen consumer and business confidence. This sustained uncertainty could weigh heavily on market sentiment, potentially remaining a drag on South Korea’s equities market into the new week. One to watch for the USD/KRW, which should see further strengthening. A retest of its October 2022 at the 1,444.71 level could play out, as a political gridlock drags on, coupled with the risks of escalation in social unrest.

Technical analysis: Hang Seng Index (HSI) stabilises for now but more conviction needed

The HSI has seen a drift higher last week, reflecting some near-term stabilisation as the index manages to cross above a downward trendline resistance for now. However, whether the gains can be followed through will likely revolve around the annual Central Economic Work Conference this week, which could still see bullish sentiments unwind in the event of any disappointment. Its daily relative strength index (RSI) is also back at its key mid-line, where we may have to see a stronger move above the 50 level to denote buyers in greater control.

The risk may come from any drift lower from here, which may then form a new lower high and suggests a continuation of the downward bias. Any drift lower could leave the 18,750 level on watch, where the lower wedge trendline support stands.