Asia equities fell on Monday, marking a muted start to a week in which the Japanese central bank may move farther away from its ultra-easy policies. Meanwhile, market pricing of interest rate reduction 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 Reuters experts surveyed anticipated a clear decision at this conference, decision-makers may begin setting the stage for a future change.
Of the 28 analysts surveyed, 17 of them supported April as the start date for eliminating negative interest rates, making the BOJ one of the few central banks in the world to genuinely tighten.
According to Barclays analyst 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 0.7% decline in Japan’s Nikkei. Outside of Japan, MSCI’s largest index of Asia-Pacific stocks fell 0.3%.
With no discernible response to news that North Korea had launched a ballistic missile near its east coast, South Korea’s main index increased by 0.3%.
Chinese blue chips decreased by 0.3% after declining for five weeks in a row.
Nasdaq futures gained 0.2% while S&P 500 futures barely moved up 0.3%. FTSE futures fell by 0.1% and EUROSTOXX 50 futures by 0.3%.
Analysts predict that the core personal consumption expenditure (PCE) index in the US will increase by 0.2% in November, but the annual inflation rate will drop to 3.4%, the lowest level since mid-2021.
A increase of 0.1% for the month would cause the six-month annualised pace of inflation to decrease to only 2.1%, virtually at the Federal Reserve’s target of 2%, according to analysts who believe the risk-reward balance is tilted towards the negative.
The markets are betting on early and aggressive action because they believe the Fed will need to loosen policy in order to prevent real rates from increasing 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 reaction, two-year Treasury rates increased just a little bit, but they still finished the week down sharply, by 28 basis points, to their lowest level since mid-May.
The yield on 10-year notes was at 3.91% after falling 33 basis points the previous week, marking the largest weekly decline since early 2020.
A 74% probability of a rate drop as early as March is implied by Fed fund futures, and a 39 basis point (bp) relaxation in May is factored in. The market also projects decreases 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 suggests three further cutbacks in 2025 and five cuts in 2024.”
If Goldman’s calculations are accurate, certain Asian central banks would be able to loosen sooner, leading to reductions in India, Taiwan, Indonesia, and the Philippines.
The investment bank also increased its prediction for the S&P 500, predicting it will close 2024 at 5,100. It said that a price-to-earnings ratio of higher than 19 would be supported by Fed easing and slowing inflation.
The dollar fell 1.3% vs a basket of currencies last week due to the market’s dovish expectation for U.S. rates, even though the Fed is by no means the only one considering rate cuts.
The European Central Bank is expected to ease policy by about 150 basis points and make cuts of 113 basis points in 2019.
The euro held tight at $1.0909 after retreating from Friday’s peak of $1.1004 due to that expectation. With a 1.9% decline last week, the dollar was looking more vulnerable versus the yen at 142.23.
At $2,021 an ounce, gold could benefit from the decline in the dollar and rates, even if it is still below its most recent all-time high of $2,135.40. [GOL/]
Following a five-month low last week due to uncertainty over whether all OPEC+ producers will continue with output limitations, oil prices were attempting to stabilise. [O/R]
Some help was provided by decreased Russian shipments and Houthi attacks on ships in the Red Sea. U.S. crude increased by 47 cents to $71.90 while Brent increased by 47 cents to $77.02 a barrel.