MORNING BID ASIA – As CPI risk dissipates… it’s takeoff!

MORNING BID ASIA – As CPI risk dissipates… it’s takeoff!
MORNING BID ASIA – As CPI risk dissipates… it’s takeoff!

A preview of the day ahead in Asian markets.

Stock markets around the world are hitting new highs, boosted by renewed optimism that the Federal Reserve will soon cut US interest rates, following benign inflation figures released on Wednesday. The most notable exception is China, where the threat of outright deflation continues to weigh on the economy and reduce risk appetite, while the yen’s rebound on Wednesday could end the recovery of Japanese stocks. Otherwise, the market mood could hardly be more positive. Stocks are soaring, bond yields are hitting their lowest levels in months, the dollar is falling and appetite for riskier investments, such as emerging market assets, is strong.

While one data point doesn’t make a trend, investors have been clinging to April’s U.S. inflation report as evidence that the Fed may begin cutting rates soon – July is in play again and the 50 Basis points reduction this year are now fully reflected.

UBS economists highlighted a particularly interesting feature of the data: in April, for the 16th time in 18 months, the monthly change in the non-seasonally adjusted core CPI was lower than the change 12 months earlier. Perhaps a trend is emerging? This is the bullish backdrop for investors in Asia who also have several key local events to navigate on Thursday, including: Japan’s first quarter GDP, Australian unemployment and a monetary policy decision in the Philippines.

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

All major drivers of growth are expected to have reversed during the quarter, which does not constitute a particularly conducive environment for further rate hikes from the Bank of Japan.

But that’s exactly what markets are waiting for – 25 basis points of tightening are now in the 2024 money market curve, bond yields are rising and the US-Japan 10-year yield spread is widening. is reduced on Wednesday to less than 340 basis points, the narrowest since March.

The yen rose 1% on Wednesday. Excluding April 29 and May 1, the two days Japan is suspected of having intervened to buy the yen, this is the currency’s best day this year. Chinese assets are struggling more, reflecting the general gloom weighing on the economy and the difficult choices facing political leaders to revive it. The new customs duties imposed by Washington on certain imports from China will have further weakened sentiment. Thursday will be full of news for Chinese companies, with heavyweights Baidu and JD.Com both reporting their first quarter results.

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

Here are the main developments that could steer the markets on Thursday:

– GDP of Japan (Q1)

– Unemployment in Australia (April)

– Decision of the Central Bank of the Philippines

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