Asia open: All eyes on PPI

Asian stocks are on track for their fourth consecutive weekly gain, potentially marking the longest winning streak in over a year unless they experience an unlikely decline of more than 1% on Friday. Despite recent economic setbacks, such as Japan and Britain slipping into recession at the end of last year and U.S. retail sales declining more than expected last month, the regional and global interest rate environment remains supportive for risk markets.

Weaker economic indicators could pave the way for relatively looser monetary policy, providing a bullish backdrop for Asian markets, particularly from an interest rate perspective, if not an eventual economic one.

Despite initial concerns at the beginning of 2024 regarding a potential equity selloff, investors have remained resilient, defying skeptics and maintaining a positive trajectory.

However, market attention is now focused on the upcoming release of the Producer Price Index (PPI) in the U.S. on Friday, which could very well play a significant role in shaping market sentiment. The PPI's implications for the Federal Reserve's preferred inflation gauge make it a closely watched indicator.

Market participants hope that the PPI data does not signal further discomfort similar to this week's hotter Consumer Price Index (CPI) readings. Ideally, investors hope that CPI readings were wrong and that the PPI throughput to the PCE price growth would receive a more favourable response when released later in the month.

Despite the potential for market volatility surrounding the PPI release, there remains a prevailing belief that the market's confidence in lower policy rates will outweigh any negative data outcomes. This sentiment suggests that the direction of policy rates holds more influence over market dynamics even though the magnitude of rate cuts has been trimmed.

Considering the current economic landscape, it was widely understood that the market's pricing-in of 175 basis points (bps) worth of rate cuts for 2024 was ambitious, particularly in the absence of concrete data confirming a slowdown in the US economy. Despite Thursday's disappointing reading on nominal spending, the broader dataset suggests a contrary narrative: if anything, the growth momentum in the US appears to have gained traction early in the year, building upon the strong performance witnessed in 2023.

This divergence becomes more pronounced when juxtaposed with the economic challenges faced by other major economies such as Germany, the UK, Japan, and China. These countries have grappled with recessions, deflationary pressures, and sluggish growth, starkly contrasting the relatively robust economic environment observed in the United States.

The resilience of the US economy, characterized by its ability to navigate global headwinds and sustain the growth momentum, underscores its position as a key driver of global economic activity. While uncertainties persist, particularly concerning monetary policy and market dynamics, US exceptionalism remains alive.