Asian markets could trade positively following an upside in global risk assets, particularly US equities, after the release of the US Producer Price Index (PPI) data. Initially, a broad-based hawkish sentiment was observed as both headline and core figures came in higher than expected. However, this reaction quickly subsided as market participants digested the details, including a downward revision of the March data showing 10 basis points of deflation. With US yields moving lower and a weaker dollar perceived, Asian tech and small-cap stocks, as well as the bond market and FX, could see gains.
Market attention now shifts to today’s US Consumer Price Index (CPI) data, along with Retail Sales and a slew of other economic indicators expected later in the week. The monthly options expiry is also on the radar for technical positioning. As US inflation data is a key driver for risk assets and capital flows, the data is expected to rise by +0.3% in April. This could still be too high for the Fed to start cutting rates this summer, cementing the view of the Fed keeping rates higher for longer. Money markets are currently pricing in around 45 basis points of rate cuts this year (implying one fully priced cut, with around 80% probability of another), with the reduction likely coming in September or November. A miss in the core and headline CPI, along with some downward revisions, could trigger a strong wave of risk-taking flows, particularly in equities, which have been highly sensitive to data recently. Conversely, a beat in the data might not lead to a strong reversal in equities, as most cuts have already been priced out in recent weeks, yet equities remain strong.
