Hang Seng Index, Nikkei 225, ASX 200: HSI and ASX 200 Fall on China Woes

As the US labor market cools and inflation concerns rise, investors across Asia brace for impact. Dive into this week’s pivotal trends and forecasts to stay ahead of the curve.

US Equity Markets: US Jobs Report Raises Fed Rate Cut Odds

It was a positive Friday session for the US equity markets. On Friday, July 5, the Nasdaq Composite Index and the S&P 500 saw gains of 0.90 and 0.54%, respectively. The Dow advanced by 0.17%.

Investors reacted to the US Jobs Report that raised expectations of a September Fed rate cut.

Notably, average hourly earnings increased 3.9% year-on-year in June after rising 4.1% in May. Softer wage growth was significant after Fed Chair Powell raised concerns about elevated wage growth trends on Tuesday, July 2.

Softer wage growth and an unexpected increase in the US unemployment rate, from 4.0% to 4.1%, signaled a September Fed rate cut.

For context, the US unemployment rate fell to 3.4 in January 2023, the lowest level since the COVID-19 pandemic.

Arch Capital Group Global Chief Economist Parker Ross reacted to the US Jobs Report, stating:

“It’s now looking increasingly likely that we’re approaching an inflection point for the labor market and the Fed should sit up and take notice.”

While the US Jobs Report will set the tone, commodity price trends, and economic indicators from Japan also require consideration.

Did softer-than-expected wage growth numbers from Japan impact expectations of a BoJ rate hike?

Average Hourly Earnings Numbers from Japan Disappoint

On Monday, July 8, average hourly earnings figures from Japan tested investor bets on a July Bank of Japan rate hike. Average hourly earnings increased 1.9% year-on-year in May after rising 1.6% in April. Economists expected an increase of 2.1%.

While higher, when compared with April, wages lagged inflation in May, suggesting lackluster household spending and more economic woes. The core inflation rate rose from 2.2% to 2.5% in May, with the annual inflation rate up from 2.5% to 2.8%.

Inflation-wage growth dynamics could leave the Bank of Japan in a holding pattern in July. A less hawkish BoJ could limit the upside for the Yen against the US dollar despite rising bets on a September Fed rate cut. Hopes of a less hawkish BoJ could support the USD/JPY at current levels and buyer appetite for Nikkei 225-listed stocks.

For perspective, wage growth has trended higher since Q3 2023 but remains below 2.3% as of June 2023.

However, the BoJ could still surprise the markets with a hawkish monetary policy decision to address the current Yen weakness.

In June, Bruegel Senior Fellow Alicia Garcia Herrero saw quantitative tightening as more effective than interventions, saying:

“Bank of Japan to start quantitative tightening, which could support the Yen more than intervention.”

Hang Seng Index and Mainland Stocks Stumble

Meanwhile, the Hang Seng Index slid by 1.40% on Monday morning. Real estate and tech stocks saw heavy losses despite rising hopes of a September Fed rate cut. Uncertainty about the Chinese economic outlook contributed to the losses, with investors wary before inflation and trade data out from China later this week.

The Hang Seng Mainland Properties (HSMPI) tumbled by 2.03%, while the Hang Seng Tech (HSTECH) Index declined by 0.69%.

Alibaba (9988) slid by 1.37%, with Tencent (0700) falling by 0.40%. However, Baidu (9888) advanced by 0.17%.

The Mainland China equity markets also had a negative start to the week. The Shenzhen Composite and CSI 300 saw losses of 0.82% and 0.39%, respectively.

On Friday, July 5, iron ore prices tumbled over concerns about the Chinese economy. Iron ore prices continued to trend lower during the Monday, July 8, morning session.

Nikkei Bucks the Market on Shifting BoJ Policy Bets

The Nikkei Index rose by 0.04% on Monday morning. Weaker-than-expected average cash earnings affected investor bets on a July BoJ rate hike. Despite a weaker USD/JPY at 160.330 on Monday, Yen levels remained weak relative to pre-intervention levels, supporting buyer appetite for Nikkei 225-listed stocks.

Softbank Group Corp (9984) rallied 1.87%, while KDDI Corp. (9433) advanced by 1.14%. Sony Group Corporation (6758) and Nissan Motor Corp. Ltd. (7201) saw gains of 0.32% and 0.07%, respectively.

ASX 200 Down as Iron Ore Prices Sink

The ASX 200 Index declined by 0.44% on Monday. Mining and oil-related stocks contributed to the losses.

Mining giants BHP Group Ltd (BHP) and Rio Tinto Ltd. (RIO) slid by 1.53% and 1.54%, respectively. Iron ore Futures tumbled on Friday (-2.39%), with iron ore spot prices sliding by 1.91% on Monday morning over concerns about the Chinese economy and demand.

Oil stocks Woodside Energy Group Ltd (WDS) and Santos Ltd (STO) saw losses of 1.54% and 1.31%, respectively. Oil prices trended lower on Monday morning.

In conclusion, investor uncertainty about the July BoJ monetary policy decision and the Chinese economic outlook tested buyer demand for riskier assets. The Asian equity markets struggled despite rising bets on a September Fed rate cut.

Considering the increasing uncertainty, investors should remain vigilant.

Closely monitor the news wires, real-time data, and expert commentary to manage trading strategies accordingly. Stay informed with our latest updates and insights to navigate the Asian equity markets effectively.