The US economy received a positive boost as the final read for the first-quarter gross domestic product (GDP) data showed a significant upward revision. The GDP growth rate reached 2.0%, surpassing the earlier forecast of 1.4%. This unexpected improvement in economic performance has helped allay concerns about a potential recession, at least for the time being. As a result, there was a notable rise in the value of small-cap stocks, with the Russell 2000 outperforming other indices and closing 1.2% higher.
Economic Resilience and Banking Sector Performance
The US banking sector also grabbed attention as all 23 lenders successfully passed the Federal Reserve’s annual stress test. This outcome demonstrates their resilience in withstanding a severe recession scenario. The positive stress test results served as a promising lead-up to the upcoming earnings releases, generating renewed market interest due to the potential for higher shareholder payouts.
Financial Select Sector SPDR Fund Recovery
However, the Financial Select Sector SPDR Fund has not fully recovered from its pre-SVB levels. Currently, the index is trading within a rising wedge pattern following the aftermath of the revision. The Relative Strength Index (RSI) has managed to remain above the 50 level, maintaining a near-term upward bias. The next challenge for buyers will be overcoming the resistance confluence zone at the 33.70-33.90 level. This zone is particularly significant as it aligns with the 200-day moving average (MA) and upper wedge trendline resistance. A successful breakthrough could potentially pave the way for further gains toward the 35.00 level.
Treasury Yields React to Rate Expectations
Treasury yields experienced a jump as rate expectations underwent a hawkish recalibration following the improved US economic profile. The two-year yields surged by approximately 15 basis-points (bp), reaching a three-month high. Similarly, the 10-year yields also saw a similar upward movement, testing their recent June high. These developments have put pressure on the rate-sensitive Nasdaq.
Anticipation for US Core PCE Price Index Release
The release of the US core personal consumption expenditures (PCE) price index later today will attract significant attention. As the Federal Reserve’s preferred measure of inflation, the PCE data has shown limited progress since the beginning of the year, in contrast to the US Consumer Price Index (CPI). If the inflation data continues to exhibit stubbornness, it could strengthen the expectation of higher rates for a longer duration and hinder the possibility of rate cuts. This perspective is further supported by recent indications of a stronger US economy.
Asia’s Stock Market Outlook
Asian stock markets are expected to open on a negative note. At the time of writing, the Nikkei is projected to decline by 0.69%, the ASX by 0.38%, and the KOSPI to show a slight increase of 0.14%. Despite the Japanese authorities mentioning potential currency intervention, doubts persist about any follow-through action due to the ongoing rise of the USD/JPY over the past week, which reflects the strength of the US dollar. The pair is currently only 0.5% away from the 145.80 level, where a previous round of yen-buying (US$19.7 billion) occurred in September 2022. However, that intervention failed to make a significant impact on the markets.
Impact of Tokyo’s Core CPI Release
This morning, Tokyo’s core consumer price index (CPI) came in softer than expected, with a reading of 3.2% compared to the forecasted 3.3%. This outcome reinforces the policy divergence between the Federal Reserve and the Bank of Japan (BoJ) and adds downward pressure on the Japanese yen (JPY). Japanese authorities may increase talks of intervention in the near future, but unless those discussions translate into concrete action, it may be challenging to curb the rise of the USD/JPY pair. Even in the event of an intervention, previous attempts in 2022 indicate that the scale of yen-buying plays a crucial role.
The USD/JPY pair will face a significant resistance test at the 145.80 level. Heightened caution may emerge regarding intervention possibilities, especially considering that technical conditions are trending in overbought territory. However, the upward trend that has been in place since the start of the year, characterized by higher highs and higher lows, suggests that any sell-off could be seen as a retracement. In this scenario, the 142.50 level becomes crucial as immediate support.
China’s NBS PMI Figures and the Road to Recovery
The upcoming release of China’s National Bureau of Statistics (NBS) purchasing managers’ index (PMI) figures will be closely monitored. The consensus anticipates a more subdued reading for June, with a projected PMI of 49, compared to the previous figure of 48.8. A lackluster result would reinforce the belief that more efforts are needed for a sustained economic recovery. To gain greater confidence that the worst is over, a consistent improvement in the data is necessary.
US Dollar Focus Ahead of US Core PCE Price Index Release
Ahead of the release of the US core PCE price index, the US dollar has been gradually strengthening. Recent resilience in Treasury yields, combined with positive economic surprises during the week, has contributed to a perception of a high-for-longer rate outlook. On the daily chart, the US dollar has reclaimed its 100-day moving average (MA) after finding support from the Ichimoku cloud. Buyers are aiming to gain more control, as evidenced by a bullish crossover on the moving average convergence divergence (MACD) indicator and the relative strength index (RSI) moving back above the 50 level. However, sustainable inflation readings will be crucial to further support the strength of the US dollar.
The immediate resistance level to overcome is situated at 103.12. A successful breach of this level could open the way for a retest of the 105.00 level. Conversely, failure to reclaim this level may result in the 2023 year-to-date lows becoming a significant support level at 100.50.
