Asia stocks fell on Monday, marking a muted start to a week in which the Japanese central bank may move further away from its ultra-easy policies. Meanwhile, market pricing of interest rate cuts in the US is anticipated to be supported by a significant reading on inflation.
There is a lot of talk leading up to the Bank of Japan’s (BOJ) meeting on Tuesday about the BOJ’s potential decision to end negative interest rates. Although none of the analysts surveyed anticipated a clear decision at this meeting, decision-makers might begin setting the stage for a future change.
Of the 28 economists surveyed, 17 supported April as the start date for eliminating negative interest rates, making the BOJ one of the few central banks in the world to tighten genuinely.
According to Barclays economist Christian Keller, “Since the last meeting in October, 10-year JGB yields have fallen and the yen has appreciated, giving the BOJ little incentive to revise policy at this stage. We think the BOJ will wait to confirm the result of the ‘shunto’ wage negotiations next spring, before moving in April.”
The strong yen contributed to a 1.2% decline in Japan’s Nikkei (.N225). The Asia-Pacific shares outside Japan’s broadest index, MSCI’s (.0MIAPJ0000PUS), fell 0.5%. In response to reports that North Korea had launched a ballistic missile off its east coast, South Korea’s main index was flat (.KS11), indicating no discernible movement.
The 0.2% increase in Chinese blue chips (.CSI300) came after five weeks of declines. While Nasdaq futures were almost flat, S&P 500 futures increased by 0.1%. FTSE futures fell 0.2% and EURO STOXX 50 futures 0.4%.
Analysts predict that the core personal consumption expenditure (PCE) index in the US will increase by 0.2% in November, while the annual inflation rate will drop to 3.4%, the lowest level since mid-2021.
A rise of 0.1% for the month would cause the six-month annualized pace of inflation to slow to just 2.1%, almost at the Federal Reserve’s target of 2%, according to analysts who believe the risk-reward balance is tilted towards the downside.
The markets are betting on early and aggressive action because they believe the Fed will need to loosen policy to prevent real rates from rising as a result of the inflation slowdown. On Friday, New York Fed President John Williams attempted to spoil the fun by stating that policymakers were not discussing any easing, but the markets were not interested in listening.
In response, two-year Treasury yields increased slightly, but they still finished the week down sharply, by 28 basis points, to their lowest close since mid-May. The yield on 10-year notes was at 3.93% after falling 33 basis points the previous week, the most since early 2020.
Fed fund futures factor in 39 basis points (bp) of easing in May, and they suggest a 70% chance of a rate cut as early as March. The market also projects cuts of at least 140 basis points for the entire year 2024.
“We now forecast three consecutive 25bp cuts in March, May, and June, followed by a slower pace of one cut per quarter until reaching a terminal rate of 3.25-3.5%, 25bp lower than we previously expected. This implies five cuts in 2024 and three more cuts in 2025,” Goldman Sachs analysts wrote in a client note. If accurate, this kind of easing would enable Goldman to bring forward cuts in India, Taiwan, Indonesia, and the Philippines, among other Asian central banks, earlier.
The investment bank also increased its prediction for the S&P 500, predicting it will close 2024 at 5,100. It added that a price-to-earnings multiple of greater than 19 would be supported by Fed easing and slowing inflation.
The dollar fell 1.3% versus a basket of currencies last week due to the market’s dovish outlook for U.S. rates, even though the Fed is by no means the only one considering rate cuts. Market expectations indicate that the European Central Bank will ease policy by about 150 basis points and the Bank of England will cut interest rates by 113 basis points in 2019.
The euro held back at $1.0896 after peaking at $1.1004 on Friday due to this outlook. With a 1.9% decline last week, the dollar was looking more vulnerable versus the yen at 142.23. At $2,019 per ounce, gold should benefit from the decline in the dollar and interest rates, even though it is still below its most recent all-time high of $2,135.40.
Following a five-month low last week due to uncertainty over whether all OPEC+ producers would continue with output caps, oil prices were attempting to stabilize. Some support was provided by decreased Russian exports and Houthi attacks on ships in the Red Sea. U.S. crude increased 20 cents to $71.63, while Brent gained 36 cents to $76.91 per barrel.
- Published By Team Genuine Reporter