Asia Day Ahead: US CPI on watch, ASX 200 eyeing a move to record high

Asia Open

The Asian session looks set for a positive start, with Nikkei +1.25%, ASX +1.09% and KOSPI +0.91%.

The positive handover from Wall Street may set the region up for a risk-on session, although risk-taking may still be somewhat limited, given that we have the upcoming US consumer price index (CPI) release as a key market risk. With the Federal Reserve (Fed) wanting to see “more good data”, the US inflation print will play a significant role in validating if markets are getting ahead of themselves in pricing for a rate cut as early as September this year.

The Nikkei has been an outrunner lately, surging close to 10% over the past three weeks and looking to extend its gains into today’s session. Renewed strength in tech and softer intervention talks of the Japanese yen may be supportive, while a wage-price spiral seems more apparent for Japan, with hopes that Japan's deflationary era may finally come to an end. Japan’s producer prices registered a 2.9% year-on-year growth for June, up from previous 2.4% and marked its highest growth since August 2023.

On the other hand, China’s inflation for June was marked with disappointment, with a deepening month-on-month contraction (-0.2%) once again highlighting the weak domestic demand. That puts the Hang Seng Index (HSI) (-0.3%) in the red yesterday, but weaker data may also drive optimism for more supportive policies in next week’s China Third Plenum. The 17,300 level may be on watch, where a crucial upward trendline support stands, which buyers may seek to defend ahead.

Look-ahead: US CPI

Expectations are for the US headline inflation to ease to 3.1% year-on-year in June, versus the 3.3% prior. The core aspect is expected to stay unchanged at 3.4%. Month-on-month, the core read is expected to stay unchanged at a 0.2% growth as well.

The Fed Chair recently mentioned that the Fed does not need to see inflation return to its 2% annual target to consider lowering interest rates, which suggests that the bar for a delay in rate cuts may be high. The big risk here will be a surprise resurgence in inflation, potentially with a month-on-month core read of 0.3% or a year-on-year read of 3.6% and above, which could challenge the Fed’s confidence of seeing “further inflation progress”.

ASX 200 eyeing another move to record high

The ASX 200 has seen some pick-up lately, recovering close to 2% over the past two weeks to bring the index back at its recent highs. Buyers seem to be taking control for now, with its daily relative strength index (RSI) extending above its mid-line amid a series of higher-lows formation since January this year.

A move above the 7,936 level may set the index up to retest the 8,235 level next. Any retracement from current point could likely find strong support at an upward trendline support around the 7,735 level, where its daily Ichimoku Cloud support stands as well.