Market Recap

The relatively quiet economic calendar overnight led to a lacklustre US trading session overall (DJIA -0.62%; S&P 500 -0.92%; Nasdaq -0.95%), with some paring of risk positions on lingering growth concerns and the lead-up to the release of US June consumer prices. Treasury yields remain lower, while the two-year and 10-year yield curve stays inverted, reflecting a defensive lean in the markets amid pricing for growth risks.

It seems that markets could go both ways with the US consumer price index (CPI) data release, with potential jitters to be found in the 8.8% headline increase expected, which may mark another 40-year high for prices. Thus far, headline consumer prices since February 2021 have been either matching consensus or coming in higher-than-expected, thus leaving the risks of any upside surprise highly intact. A hot inflation print may cement the case for tighter policy measures from the Fed, potentially posing as headwind for equities if it hits the 9% print. Talks of a 100 basis-point (bp) hike could surface along with that.

That said, there is a possibility that markets may eventually decide to look beyond the current figure after a knee-jerk reaction and buy into the stance of peaking inflation with falling oil prices and a further tick lower in the core aspect for US inflation. Oil prices have been down more than 20% from its June high, while core CPI is expected to continue lower to 5.7% from the previous 6%. Either way, market volatility will be expected, heading into the key risk event of the week.

A spinning top for the US dollar index overnight suggests indecision for now, with sentiments on hold for the upcoming US CPI to steer rate hike expectations. Technical conditions are at oversold levels, with relative strength index (RSI) in overbought territory and moving average convergence divergence (MACD) hitting its previous peak in May this year, which was followed through with a retracement at that time. With that, just matching expectations for the upcoming CPI print may not necessarily be sufficient in driving further strength for the US dollar and an outperformance in inflation reading could be heavily looked upon.

Asia Open

Asian stocks look set for a muted open, with Nikkei +0.59%, ASX +0.05% and KOSPI +0.11% at the time of writing. Some wait-and-see could be playing out in the Asia session with the lacklustre handover from Wall Street as all eyes remain on several central bank decisions and the US CPI data ahead. With virus concerns in China, the Nasdaq Golden Dragon China Index managed to display some resilience, reversing earlier losses to eke out a 0.2% gain but one may note that the slight gain comes after a 7% plunge on Tuesday. The Asia session will see interest rate decision out of the Bank of Korea (BOK) and the Reserve Bank of New Zealand (RBNZ). This is followed by the Bank of Canada (BoC) later tonight.

For the RBNZ, a 50 bp hike has been largely priced but forward guidance on economic conditions will be key. Weakening economic growth has surfaced with the latest fall in sale activities in its housing market, along with an earlier contraction for its quarter one (Q1) gross domestic product (GDP) figure. A look at the NZD/USD reveals an ongoing downward trend since February last year, with recent moves forming a new lower low. This marks its lowest level since June 2020. The trend for the pair remains weighed by ongoing US dollar strength, with a break below its key support of the 0.622 level last week bringing a bearish bias overall, which coincides with a key 61.8% Fibonacci retracement. Further retracement could leave the 0.593 level on watch next.

On the watchlist: Brent crude back below US$100 a barrel

Attempts to recover for Brent crude prices have been relatively short-lived thus far, as a series of headwinds ranging from global recession concerns, China’s virus situation and a surging US dollar have seemingly put a cap on prices. All these risk factors on demand outlook overrode the current tight conditions in the oil market, leading to a 6% plunge in oil prices overnight despite the Organization of the Petroleum Exporting Countries (OPEC) expecting global oil demand growth to exceed the increase in supplies by 1 million barrels a day next year.

On the technical front, the lower highs and lower lows kept the near-term downward trend intact. The lower highs on net-long positions among money managers from the Commodity Futures Trading Commission (CFTC) data also suggests some unwinding of bullish bets. The risks in further pricing for growth concerns remain with several economic data release ahead this week and further retracement could leave the US$92.87 level on watch, where a 61.8% Fibonacci retracement level stands in place.

Tuesday: DJIA -0.62%; S&P 500 -0.92%; Nasdaq -0.95%, DAX +0.57%, FTSE +0.18%