Asian equities rally on China's economic boost

Market sentiment improves with China's policy support while US faces economic challenges amid inflation concerns.

By Ahmed Azzam | @3zzamous | 25 July 2023

  • Asian equities surge on China's economic boost

  • Dollar index dips ahead of key US Federal Reserve decision

  • US PMI data signals slower growth, weaker job creation, and sticky inflation

  • Investors eagerly await US consumer confidence data to gauge economic activity

Asian equities soared on Tuesday following China's commitment to bolster its economy through increased policy support, with a particular emphasis on bolstering domestic demand and reviving the struggling property market. Hong Kong and mainland China stocks led the charge, with the SHANGHAI 50 surging to a 5-week high of 2571. Australian and South Korean shares also witnessed gains, but Japanese stocks experienced a decline, primarily due to a pullback in the technology sector.

Dollar index dips ahead of US Federal Reserve's key decision

The dollar index edged down slightly to around 101.2 on Tuesday, ending a five-day winning streak as traders exercised caution ahead of crucial policy decisions from the US Federal Reserve. The market widely anticipates a 25-basis-point increase in interest rates by the Fed on Wednesday. All eyes will be on Fed Chair Jerome Powell's post-meeting remarks for any hints on the central bank's future course of action.

Mixed signals in US PMI data reflect economic challenges

In the US, the PMI Manufacturing gauge rose from 46.3 to 49.0 in July, indicating a slight improvement in the sector. However, PMI Services dropped from 54.4 to 52.4, and PMI Composite dipped to 52.0, marking a 5-month low. These figures reflect a worrying combination of slower economic growth, weaker job creation, diminished business confidence, and persistent inflationary pressures.

The overall rate of output growth, encompassing both manufacturing and services, points to a GDP expansion at an annualized quarterly rate of approximately 1.5% at the beginning of the third quarter. This is lower than the 2% pace recorded in the second quarter, signifying a slowdown in economic momentum. Notably, growth is primarily being driven by the service sector, supported by increased spending from international clients, which is compensating for a stagnant manufacturing sector and weakening demand from US households and businesses.

Adding to concerns, business optimism regarding the year-ahead outlook has sharply deteriorated to the lowest level seen so far this year. This dimming economic outlook raises downside risks to output growth in the coming months and sustains fears that the US economy may face another downturn before the year's end.

Persistent price pressures also remain a significant worry, as the survey index of selling prices has reliably foreshadowed consumer price inflation, indicating that inflation rates below 3% may remain elusive in the near term.

Investors watch US consumer confidence data

Meanwhile, investors eagerly await the release of US consumer confidence data, which could potentially show an increase from 109.7 to 112.1. This metric serves as a leading indicator of consumer spending, which plays a vital role in driving overall economic activity.