Asia Day Ahead: Fed comments downplay inflation concerns, Japan’s GDP marked technical recession

Market Recap

Following the recent US consumer price index (CPI) shock, Wall Street managed to regain some ground overnight as comments from Chicago Federal Reserve (Fed) President Austan Goolsbee downplayed inflation concerns and suggested some overreaction to the data. In his speech, the Fed official stated that even if inflation comes in a bit higher for a few months, it would still be consistent with the Fed’s path back to its 2% target, which offered some reassurances around the Fed’s inflation fight.

Market rate expectations seen in Fed funds futures barely budged, but US Treasury yields reacted to the downside, with the US two-year yields lower by 8 basis points (bp). That has been well-received by the equities market, with the S&P 500 back to retest its key psychological 5,000 level on a rebound in tech. The US dollar edged lower, although the series of higher highs and higher lows since the start of the year may still suggest a near-term retracement within a broader recovery.

With the recent inflation ‘scare’, attention will now be focused on the core Personal Consumption Expenditures (PCE) Price Index to be released on 29 February. Being the Fed’s preferred measure for their 2% inflation condition, the US core PCE has revealed more promising progress than the CPI thus far, with a dip below the 3.0% mark in December. Any further easing on that front may renew market conviction that the Fed has room for rate cuts over coming meetings.

For now, the US dollar has crossed above its Ichimoku cloud resistance, with a retest of its 100-day and 200-day moving average (MA) finding a bullish reaction. Its daily relative strength index (RSI) continues to trade above the 50 level, which may overall still leave an upward bias in place. The 103.80 level may serve as immediate support to hold, while on the upside, buyers may set their sight to retest the 105.30 level next.

Asia Open

Asian stocks look set for a positive open, with Nikkei +0.87%, ASX +0.74% and KOSPI +0.23% at the time of writing, with sentiments tapping on the positive handover from Wall Street for some recovery. Economic calendar this morning saw a surprise contraction in Japan’s preliminary 4Q gross domestic product (GDP), which marked a dip into a technical recession as weaker private consumption and capital expenditure remain the stumbling blocks. The downside surprise in growth conditions may further support the view that Japanese policymakers may refrain from delivering any major policy changes in its March meeting.

The final read for Singapore’s 4Q GDP also surprised on the downside this morning, which call for a downward revision of full-year 2023 growth to 1.1% from previous 1.2%. However, it continues to reflect an economic recovery underway in the 4Q, with bright spots seen in the good sector’s reversion to expansionary territory while services activities held resilient. While authorities stuck to their cautious script of seeing significant downside risks in the global economy, the growth forecast of 1%-3% for 2024 is maintained, which suggests that a gradual recovery in economic conditions remains the base case.

On the technical front, the ASX 200 may warrant some focus, with bearish divergences on daily RSI and moving average convergence/divergence (MACD) suggesting abating upward momentum in the near term. That said, a series of support confluences will remain on watch on any retracement, particularly the upper edge of its daily Ichimoku cloud and an upward trendline support. On the upside, the 7,650 level remains as key resistance to overcome, with any successful break potentially leaving the 7,800 in focus next.

On the watchlist: EUR/USD attempting to defend key horizontal support

After retracing close to 4% from its December 2023 high, the EUR/USD is back to retest a horizontal support at the 1.072 level. Some breather in the US dollar overnight, along with an unexpected expansion in Eurozone’s industrial production, provide near-term catalysts for dip buyers to tap on for some relief.

That said, a rejection of its 100-day MA to start the week, along with its RSI on the daily chart trading below the 50 level, suggests that the near-term trend may remain downward bias for now. On the upside, the 100-day MA may have to be overcome to provide greater conviction of buyers taking back control, while on the downside, any failure for the 1.072 level to hold could pave the way towards the 1.063 level next, where a lower channel trendline support resides.

Wednesday: DJIA +0.40%; S&P 500 +0.96%; Nasdaq +1.30%, DAX +0.38%, FTSE +0.75%