Cautious mood remains with key US PCE price index on watch: US dollar, China A50, Gold

Market Recap

The US equity markets largely traded within a tight range and ended flat overnight (DJIA +0.27%; S&P 500 -0.07%; Nasdaq -0.03%), which revealed some wait-and-see ahead of the key US personal consumption expenditures (PCE) price index release later today. A fresh glimpse of global pricing pressures may have surfaced from inflation figures out of Spain and Germany yesterday. The former’s inflation rate for June towered way above expectations at a 10.2% increase year-on-year (YoY) versus the 9% forecast. While Germany’s inflation may come in below expectations at 7.6% YoY, this may be attributed to its government’s intervention with a temporary energy relief package and the upside risks to inflation in the region remains present as seen from its other counterparts. Expectations for the upcoming US PCE price index are hanging precariously close to the previous month’s figure, which run the risks of having just a slight outperformance overturning any hopes of a peak in inflation. That may restrict market’s attempt to recover yesterday after its recent heavy sell-off, with a cautious lean presented in the outperformance for defensive sectors overnight.

Other developments also failed to see much relief on the economic growth front. The final estimates for US gross domestic product (GDP) declined more than expected last quarter (-1.6% versus 1.5% forecast). Commentaries from central bankers also warned of a longer-lasting inflation regime and reiterated their resolve to tackle inflation as the priority. Fed Chair Jerome Powell raised that the Fed aims to move into ‘restrictive territory fairly quickly’, with the growth risks translating into a plunge for the US Treasury yields as markets seek for bonds’ cover.

After retracing 2% from its recent peak, the US dollar is moving higher on the back of a more risk-averse market mood, while pricing for upside risks to inflation heading into the upcoming US PCE price index release. The index may seek to break into a new higher high ahead, while near-term support remains at 103.80. This level marks its previous peaks back in 2016 and 2020, which may now serve as a resistance-turned-support.

Asia Open

Asian stocks look set for a lower open, with Nikkei -0.38%, ASX -0.31% and KOSPI -0.56% at the time of writing. A holding pattern may largely play out in today’s Asia session as well, coming after some signs of market indecision in Wall Street overnight and looking ahead to a key US inflation data. Some dip buyers may have previously interpreted China’s recent move to shorten quarantine period for inbound travellers as a positive shift away from its strict virus stance, but latest comments from President Xi backing China’s zero-Covid stance seem to show that such beliefs are premature. Following these conflicting signals, some unwinding of previous optimism took place yesterday, along with the global risk-off mood.

Ahead, one may watch if China’s Purchasing Managers' Index (PMI) print may provide a catalyst for near-term relief, where further recovery in economic conditions is expected to be displayed. Current consensus is for both the manufacturing and non-manufacturing sectors to revert to expansionary territory at readings of 50.5. Backing away from contraction could bode some hopes that the worst may be over for now. The China A50 index has broken out of an ascending channel pattern last week, with recent retracement bringing it close to the upper channel trendline. A better test of support may be at the 14,500 level, with the level supporting the index on at least four occasions. The upward bias remains intact for now, with the higher highs and higher lows displaying an upward trend.

On the watchlist: Gold prices’ gains were quick to be overturned thus far

Gold prices have been failing to see any uplift over the past two weeks. Despite attempts to reverse higher on the back of falling Treasury yields and some risk-aversion sentiments, gains were quick to be overturned thus far. This could suggest that the lingering uncertainty on the extent of policy tightening to curb inflation may still be having a hold on the yellow metal’s prices, with central bankers’ comments overnight continuing to reiterate their resolve in keeping prices down as the priority. On the technical front, gold prices have been trading within a descending channel pattern since March this year. While the increasing growth risks may still be tailwind for the safe-haven asset, we may have to see a move above the US$1,850 to suggest a more convincing reversal. This is where a horizontal support-turned-resistance lies in place with a key 76.4% Fibonacci retracement level.

Wednesday: DJIA +0.27%; S&P 500 -0.07%; Nasdaq -0.03%, DAX -1.73%, FTSE -0.15%