Asia open: A busy week as the Fed goes dark

US stocks are beginning the week on the back foot, with a decline of over 5% from the record highs seen at the end of last month. Much hangs on big-tech earnings reports, scheduled to hit the ticker tape over the next few days, and are now under intense scrutiny after signs of fissures appeared in the mega-cap construct.

Macro watchers have an important week ahead as they navigate through a series of significant releases from the US alongside the subtleties of a Bank of Japan (BoJ) meeting.

The initial estimate of Q1 GDP from the world's largest economy is on the horizon, with consensus expectations suggesting an expansion of 2.7% last quarter.

It goes without saying that this figure contradicts the Federal Reserve's efforts to engineer a slowdown, aiming for a more "sustainable" pace of growth.

While a 2.7% growth rate would represent a notable slowdown compared to the latter part of 2023, it hardly suggests an economy ready to buckle.

As recession banter fades into the background, the focus of the week shifts to the realease of personal income and spending figures for March, along with the month’s PCE price data, scheduled for Friday. Investors anticipate that these data points will likely reinforce the notion that the disinflation process isn’t progressing in a manner conducive to near-term rate cuts.

The headline PCE data covering March will be in the calculus by the time it’s unveiled courtesy of the previous day’s report, but the personal spending release still has market-moving potential. Specifically, traders will look to the PCE-derived “supercore” inflation measure to refine expectations for the May FOMC meeting where anything cooler would come as a welcome surprise and likely be greeted with enthusiasm on Wall Street.

As the Federal Reserve enters a self-imposed communications blackout ahead of the next policy gathering, many in the market see this as a welcome relief from the constant barrage of hawkish rhetoric.

Macroeconomic forecasters, including the Federal Reserve, are currently placing greater emphasis on data dependency than usual. Given the elevated levels of economic and financial uncertainty, they are closely scrutinizing each day's data releases to shape their perspectives on the Federal Reserve's policies, inflation trends, and consumer behaviour. However, relying heavily on real-time data can introduce a challenge: the risk of succumbing to recency bias, where recent events disproportionately influence forecasting.

Extrapolating first-quarter strength into subsequent quarters is seldom a sure bet. Historical data reveals that a single quarter of robust consumer spending growth often fails to predict the growth rate in the following quarter. For instance, last year witnessed a scorching 3.8% annualized rate of real consumer spending in the first quarter, only to plummet to a lacklustre 0.8% rate in the second quarter.

Following one of the most challenging weeks in the market this year, investors are seeking a rebound, but the road ahead looks daunting. Recent hawkish remarks from the Federal Reserve, escalating tensions in the Middle East, and a continued decline in tech stocks are all contributing to the challenging environment.

The hawkish tone from Fed officials has injected uncertainty into the market, with investors grappling with the prospect of higher interest rates. Additionally, geopolitical tensions in the Middle East are adding to the sense of unease, as concerns about potential disruptions to global markets linger.

Meanwhile, weakness in the tech sector, which has been a driving force behind market gains in recent years, is weighing heavily on sentiment. The sector's struggles reflect broader concerns about valuations and regulatory risks.

In this environment, investors will need to tread carefully and remain both data and headline-vigilant as they navigate the complexities of the current market landscape.

Forex

All eyes are on Asia's most traded currency pair as USDJPY hovers near 34-year peaks, nearing 155.00 market. Investors are closely watching to see if Japanese authorities will follow through on recent warnings against the yen's depreciation with intervention.

Thus far, Tokyo's response has been limited to verbal warnings, which the market thinks rigs hallow. Bank of Japan Governor Kazuo Ueda indicated during a speech in Washington on Friday that the central bank would "very likely" raise interest rates if underlying inflation continued to rise.

Meanwhile, along the ringing hallow lines, the latest positioning data from U.S. futures markets revealed that hedge funds and speculators increased their aggregate net short yen position in the latest week, reaching a new 17-year high. This suggests growing sentiment favouring further yen depreciation in the near term.