Investors across Asia were in a buoyant mood on Tuesday morning as most major indices ticked higher, led by a bounce in Australian shares. Market attention now turns to crucial US inflation figures due later this week which could provide further clues on the Federal Reserve’s rate hiking path.
The MSCI Asia Pacific index outside Japan rose 0.2% in early trade, building on the positive lead from Wall Street overnight. US futures however wavered Tuesday morning as some questions still linger about the near-term inflation outlook.
“The market is now looking for five US rate cuts in 2024, which we think is too aggressive,” said Marcella Chow, Global Market Strategist at JPMorgan Asset Management in Hong Kong. “We’re looking to three, not five.”
She added: “Inflation has not returned to the target just yet and the Fed should not be in too much of a rush to cut.”
Upbeat Australian Data
Australia’s benchmark S&P/ASX 200 index jumped 0.95% to notch up strong gains, as the latest data showed retail sales notching their biggest monthly rise in two years in November. The much stronger-than-expected print underscores the resilience of the Australian consumer even in the face of high inflation and rising interest rates.
“The Australian share market has received an early boost thanks to the better-than-expected retail sales figures for November,” said James Tao, Market Analyst at CommSec. “Consumers are continuing to spend even against the backdrop of rising inflation and interest rates.”
The Australian dollar also pushed higher on the upbeat data.
Japan, Hong Kong Advance
Japan’s Nikkei 225 index climbed 1.14% as the yen held steady near 7-month highs against the US dollar. Core consumer inflation data released Tuesday showed price pressures easing slightly in Tokyo, relieving some pressure on the Bank of Japan to tighten policy.
Hong Kong’s Hang Seng index added 0.26% while China’s CSI 300 bluechip index was up 0.21%. Sentiment has improved in Chinese markets due to attractive valuations, but foreign investors are likely to remain cautious until concrete stimulus measures materialize.
“Investors’ conviction and confidence is driving the Chinese market now because on the fundamentals side in terms of earnings and revenue performance it’s okay,” said Zhikai Chen, Head of Asian Equities at BNP Paribas Asset Management. “But investors are just not willing to buy China or China linked companies even though the valuations have gone down so much.”
All Eyes on US Inflation Figures
Market attention now turns to the latest US consumer price index figures for December, scheduled for release on Thursday. Economists expect headline inflation likely rose 0.2% over the month, translating to an annual rate of 3.2%.
The data comes on the heels of an inflation expectations survey from the New York Fed on Monday, which showed consumers’ near-term inflation forecasts easing to the lowest levels since January 2021.
Markets have latched on to any signs of peaking price pressures, hoping it gives the Fed room to slow or halt interest rate hikes sooner. Futures pricing currently indicates bets for rate cuts to commence in the second half of 2023.
“The market is getting ahead of itself in expecting aggressive Fed easing next year,” said Ms Chow from JPMorgan. “Inflation remains sticky and above target. We think any rate cuts are more likely to happen in 2024 rather than 2023.”
Cautious on China
Chinese markets were among the worst performing globally in 2022, with the benchmark CSI 300 index sliding nearly 11% over the year compared to a 20% rise for global shares.
Analysts say foreign investor confidence in Chinese assets remains fragile due to gruelling Covid restrictions for much of last year combined with a property market downturn.
“Foreign investors are likely to remain out of the Chinese equities markets until there are clearer signs of stimulus to support domestic consumption and the country’s troubled property sector,” said Pei Sheng, Economist at MUFG Bank in Singapore.
But some see value emerging after last year’s heavy sell-off.
“Investor conviction and confidence is driving the Chinese market now because on the fundamentals side in terms of earnings and revenue performance it’s okay,” said Zhikai Chen, Head of Asian Equities at BNP Paribas. “But investors are still cautious to buy China linked companies even though the valuations have come down so much
