Asia open: Inflation and tariffs take center stage in discussions

Markets

In the upcoming week, market focus will center around inflation data from the US, the world's largest economy, poised to influence global market sentiment.

As we kick off the week on Monday, overall market sentiment appears optimistic. The potential for a US interest rate cut in September has re-entered the conversation, while Wall Street is revisiting recent highs and European indexes are reaching new peaks. Furthermore, Asian markets are experiencing a boost, with China and Hong Kong driving up regional stock prices. But with US tariffs on China EVs about to rock the boat, global markets could be again sailing in choppy seas.

Additionally, oil prices have dipped to their lowest levels in two months, and the dollar is less of a wrecking ball with bulls retreating gradually back to the pen. These combined factors contribute to a broader feel-good story fostering a positive outlook as trading commences at the beginning of the week.

Given inflation's significant decline from its peak, the Federal Reserve is more apt to monitor softer labour market conditions and its by-products more closely. As Powell indicated, the Fed is "prepared to respond to an unexpected weakening in the labour market," shifting focus towards employment dynamics alongside inflation metrics.

But a cooler or even consensus reading on core CPI would further reinforce the recent shift in the tone of the US macro narrative where several factors still echo in the backdrop ahead of this week’s inflation update. These include the April Non-Farm Payrolls (NFP) undershoot, subdued average hourly earnings, contractionary ISM readings, a slight uptick in initial jobless claims (possibly distorted by seasonal factors in New York), and weakening consumer sentiment.

So if core price growth remains benign this week, market expectations for 50 basis points of rate cuts from the Fed in 2024 could firm up. But if the print comes in cool traders might incorporate additional cut premiums, potentially factoring in the odds of a third cut.

By week's end, we'll likely gain clarity on whether market expectations have veered too far off course leaning excessively towards a hawkish stance from the Fed.

Asia markets

The Biden administration is poised to unveil a new wave of tariffs targeting strategic sectors in China, signalling a significant escalation in trade tensions. Among the key measures is a notable increase in levies on electric vehicles. Expected to be formally announced on Tuesday, the comprehensive plan will maintain existing tariffs on numerous Chinese goods initiated during the tenure of former President Donald Trump, while also introducing fresh tariffs on semiconductors and solar equipment. This announcement is anticipated to roil the bond markets and dampen sentiment across various sectors, triggering widespread but hopefully short-term turbulence in financial markets. That said as history suggests when it comes to the trade war escalation, some form of tit-for-tat response is usually the norm.

The most recent data from Saturday showed that consumer price inflation in China for the previous month slightly exceeded expectations. However, there was a further decline in producer deflation, indicating ongoing downward pressure on pipeline prices.

Moreover, new bank lending in China witnessed a more significant decrease than expected in April, with overall credit growth ominously hitting a record low. These trends emphasize the sluggishness of the economic recovery and underscore the need for additional measures from Beijing to bolster growth. But at the end of the day, you can lead the horse to the water but you can’t make him drink.