Mixed global signals, Indonesia rate call eyed

A mixed day in world markets on Monday suggests there will be no clear narrative driving Asian markets at the open on Tuesday, with investors still leaning on US earnings, remarks from Fed officials,17 and signals from China’s ‘third plenum’ for guidance.

There are key events and data releases that will move asset markets in their respective countries, namely an interest rate decision and guidance from Indonesia’s central bank, and inflation figures from New Zealand.

But otherwise, it’s a mixed bag.

For example, gold jumped 2% to a record high of USD 2,469 an ounce on Tuesday yet the dollar rose and the 10-year US Treasury yield slid to a four-month low of 4.16%.

The US yield curve paused its recent steepening trend too – having turned positive on Monday for the first time since January, the 2s/30s curve inverted again on Tuesday. The 6 basis point reversal was pretty steep, with no obvious trigger.

Asian stocks could get a lift from Wall Street’s rise after figures showed that US retail sales in June were much stronger than economists had expected. The Dow notched a record closing high, while Big Tech struggled to close in the green.

These retail sales numbers may have boosted optimism about the US economy – the Atlanta Fed’s GDPNow Q2 tracking estimate rose to 2.5% from 2.0% – but not world oil prices. Worries over weak demand from China pushed oil to a one-month low.

Japanese markets are up and running again after Monday’s holiday. Bond yields slipped to their lowest in nearly three weeks, with the 10-year JGB yield down to 1.02% on Tuesday. This likely contributed to the yen’s fall back below 158 per dollar.

Bank of Japan data on Tuesday suggested that Tokyo may have spent an additional 2.14 trillion yen (USD 13.5 billion) on foreign exchange market intervention to shore up the yen on Friday. This would follow the estimated 3.37-3.57 trillion yen spent intervening on Thursday.

According to International Monetary Fund Chief Economist Pierre-Olivier Gourinchas, the Bank of Japan’s biggest challenge is not maintaining the yen’s value but maintaining price stability and keeping inflation within its target.

Gourinchas was speaking after the IMF cut Japan’s economic growth forecast due to temporary auto output disruptions and weak private investment in the first quarter, but welcomed recent bumper pay hikes that should lift household incomes.

The IMF’s outlook for China was the exact opposite. The IMF significantly hiked its 2024 and 2025 growth forecasts to 5.0% and 4.5%, respectively. But perhaps unsurprisingly, given Monday’s alarmingly weak Q2 data, Gourinchas said risks are very much to the downside.

Little wonder that bond yields and the yuan remain under constant downward pressure, and investors will be hoping the ruling Communist Party’s third plenum offers concrete signs that further support for the economy is coming.

Here are key developments that could provide more direction to markets on Wednesday:

– Indonesia interest rate decision

– New Zealand inflation (Q2)

– China’s third plenum

(Reporting by Jamie McGeever)