Initial gains failed to hold ahead of Fed Chair Powell’s speech: S&P 500, Straits Times Index, USD/JPY

Market Recap

Major US indices attempted to follow through with last Friday’s bounce but gains failed to hold mid-day, following pressures from various Federal Reserve (Fed) officials’ commentaries on higher-for-longer rates, along with weakness in the healthcare sector (-1.7%). Both Raphael Bostic and Mary Daly called for peak rates to be above 5%, which is more hawkish than what markets are pricing at the moment (4.75-5% range). While both officials are not voting members currently, the de-risking could come from fears that the upcoming speech from Fed chair Jerome Powell today could mirror the hawkish tone with some pushback as well.

Thus far, ongoing moderation in pricing pressures has been heavily looked upon to justify market’s views of a less-hawkish Fed. Along with last week’s downside surprise in wage inflation, median one-year-ahead consumer inflation expectations from the New York Fed survey overnight also reflected its lowest reading since July 2021. Both Treasury yields and the US dollar extended their declines yesterday, with the US dollar breaking below its recent consolidation zone. The formation of a new lower low reiterates its overall downward bias, leaving the 101.30 level on watch next. Ahead, the US consumer price index (CPI) will be in focus this week to further challenge a less-hawkish stance from the Fed, with both core and headline expected to show further moderation.

The S&P 500 has broken above its previous ranging pattern to end last week, but overnight downside move seems to be calling for a retest of the upper consolidation range. A bearish pin bar has been formed and equity bulls may have to defend a close below the candlestick to keep hopes of further upside alive. A stronger test of resistance could be at the key 4,000 level, where a longer-term downward trendline stands.

Asia Open

Asian stocks look set for a mixed open, with Nikkei +0.80%, ASX -0.24% and KOSPI +0.19% at the time of writing. After coming back online from its holiday break, the Nikkei is largely playing catch-up to previous positive sentiments. Despite the mixed closing in US indices, the Nasdaq Golden Dragon China Index managed to close 0.72% higher, with optimism over borders’ reopening still in play. Yesterday, the Hang Seng Index continued to pull ahead of its 200-day moving average (MA), but with the 46% upmove since November 2021 bringing technical conditions to overextended territory thus far, accumulation on a pullback seems to be the lower-risk option. Risks of virus waves after the Chinese New Year period could be a catalyst for some jitters, which could prompt profit-taking activities.

Economic data this morning saw a surprise contraction in Japan’s household spending (-1.2% year-on-year versus 0.5% forecast), while Tokyo’s core CPI came in higher than expected (4% versus 3.8% forecast). The combination of both data is likely to prompt further wait-and-see from the Bank of Japan (BoJ), keeping its accommodative policies on hold at least for the first quarter this year. Focus on weak economic conditions, pushback to inflationary pressures with ‘transitory’ stance and weaker US dollar relieving risks of passthrough inflation remains in place.

The Straits Times Index has attempted to break above a consolidation zone in place since mid-November last year, but failed to sustain above it yesterday. Further attempts by equity bulls to overcome the line of resistance could still play out, with the upcoming US banks earnings release later this week on watch to provide further catalysts. Banking stocks account for close to 45% of the overall index’s weightage. On the flipside, any close below the 3,290 level could support bearish pressure in control for now, which could prompt further downside towards the lower consolidation base at the 3,220 level.

On the watchlist: USD/JPY remains guided by falling channel pattern

Recent economic data has driven market participants to lean towards less-hawkish rate hike expectations from the Fed, with Fed Funds futures reflecting bets of terminal rate back below 5%. On the contrary, the BoJ is expected to deliver rate hike on or after April 2023 this year, with the shifting dynamics of policy divergence between these two central banks delivering less of a yield differential for USD/JPY (大口）. Thus far, the USD/JPY has remained well-guided by a falling channel pattern, with recent attempt for a bounce finding resistance at the upper channel trendline. The next line of support stands at the 130.80 level. Failure for the line to hold could prompt a move towards the lower channel trendline support at the 126.84 level. For now, the pair remains bearish bias, having fallen below its key 200-day MA for the first time since February 2021 and suggesting an ongoing trend reversal in place.

Monday: DJIA -0.34%; S&P 500 -0.08%; Nasdaq +0.63%, DAX +1.25%, FTSE +0.33%