Morning Bid: As CPI risk clears … it’s lift off!

By Thomson Reuters May 15, 2024 | 4:51 PM

By Jamie McGeever

(Reuters) – A look at the day ahead in Asian markets.

It’s ‘green for go’ in Asia on Thursday as stock markets around the world roar to fresh highs, boosted by renewed optimism that the Federal Reserve will soon start cutting U.S. interest rates following benign inflation figures on Wednesday.

The most notable exception is China, where the threat of outright deflation continues to loom large over the economy and depress risk appetite, while the yen’s rebound on Wednesday could halt the Japanese equity revival in its tracks.

Otherwise, the market mood could barely be more positive. Stocks are on fire, bond yields are sliding to the lowest levels in months, the dollar is retreating and appetite for riskier investments like emerging market assets is strong.

While one data point does not a trend make, investors have latched onto the U.S. inflation report for April as evidence the Fed can start cutting rates soon – July is back in play and 50 basis points of cuts this year is now fully priced.

Economists at UBS highlighted one particularly interesting nugget from the data – April marked the 16th time in 18 months when the non-seasonally adjusted core CPI one-month change was below the change 12 months prior. Maybe a trend is in place?

That’s the bullish backdrop for investors in Asia who also have several key local events to navigate on Thursday, including: first quarter Japanese GDP, Australian unemployment and a monetary policy decision from the Philippines.

First quarter GDP data from Japan are expected to show Asia’s second largest economy contracted an annualized 1.5% in the January-March period, signaling a quarterly decline of 0.4%, according to a Reuters poll.

All key drivers of growth are expected to have gone into reverse in the quarter, not a particularly conducive environment for further rate hikes from the Bank of Japan.

But that’s exactly what markets are expecting – 25 bps of tightening is now in the 2024 money market curve, bond yields are rising and the 10-year U.S.-Japan yield spread on Wednesday shrank to less than 340 bps, the narrowest since March.

The yen rallied 1% on Wednesday. Excluding April 29 and May 1, the two days of suspected yen-buying Japanese intervention, it was the currency’s best day this year.

Chinese assets are struggling more, mirroring the wider gloom hanging over the economy and the difficult choices policymakers face in lifting it. Sentiment will have been dampened further by Washington’s new tariffs on some imports from China.

It’s a big day for Chinese company news on Thursday, with heavyweights Baidu and JD.Com both reporting first quarter earnings.

In the Philippines, meanwhile, the central bank is expected to keep its key policy rate unchanged at 6.50%, and not lower it until the final quarter of this year, according to a Reuters poll.

Here are key developments that could provide more direction to markets on Thursday:

– Japan GDP (Q1)

– Australia unemployment (April)

– Philippines central bank decision

(Reporting by Jamie McGeever; Editing by Josie Kao)