On Tuesday, December 12th, Asian stock markets rose while the US dollar fell as investors remained cautious ahead of the release of the key US inflation report later today. This report will set the tone for the interest rate meetings of multiple central banks this week.
The market generally expects the Federal Reserve to maintain interest rates unchanged on Wednesday, with focus on the speech of Federal Reserve Chairman Jerome Powell at a press conference, as well as the Federal Reserve's dot matrix and economic forecasts.
The Federal Reserve's CPI is leading the way
Prior to this, the Consumer Price Index (CPI) report released by the US Department of Labor late Tuesday is expected to show that inflation is still cooling, but still far above the Federal Reserve's annual target of 2%, with core CPI expected to reach 4%. This means that investors are hesitant when making significant bets.
In Asia, Morgan Stanley Capital International's most widely used Asia Pacific stock index outside of Japan rose 0.54%.
"I think a soft landing is now firmly reflected in market prices and quickly becoming a common prospect for 2024," said Ben Bennett, Asia Pacific investment strategist at Legal and General Investment Management (LGIM). "Therefore, if the data deviates too far from this path, there may be some disappointment."
Weakened expectations of the Federal Reserve's interest rate cut
At the beginning of this month, a series of economic data and comments from Federal Reserve officials sparked market expectations that the Federal Reserve would start cutting interest rates early next year, but some investor expectations have since fallen.
According to the FedWatch tool of the Chicago Mercantile Exchange (CME), the market currently expects a 48% chance of a rate cut in March, compared to 57% a week ago. However, the market has a 75% chance of a rate cut in May.
Analysts say that since the last meeting of the Federal Reserve in early November last year, the financial situation has relaxed, which may affect the Fed's thinking.
"The Federal Reserve will feel that it cannot afford the consequences of further easing of financial conditions, as it may re accelerate labor demand and bring new upward pressure to consumer inflation," said Erik Weisman, Chief Economist and Portfolio Manager at MFS Investment Management. "Whether the market will accept this suggestion remains to be seen, as it may be more driven by macroeconomic data rather than lobbying by the Federal Reserve."
This week has been a busy week for central bank governors, with the European Central Bank, Bank of England, Bank of Norway, and Swiss Bank all scheduled to meet on Thursday.
After the auction of three-year and 10-year treasury bond on Monday was flat, the yield of 10-year treasury bond fell 3.1 basis points to 4.208%.
Investors are unwilling to buy government bonds in the auction due to weakened liquidity due to inflation data and the upcoming Federal Reserve meeting this week.
The US Treasury Department will auction $21 billion in 30-year bonds for reopening on Tuesday, and $50 billion in three-year and $37 billion in 10-year bonds on Monday.
In the foreign exchange market, the Japanese yen remains the focus as expectations of the Bank of Japan preparing to withdraw from ultra loose monetary policy fade. Earlier, Bloomberg reported on Monday citing sources that Bank of Japan officials believed there was no need to hastily withdraw from negative interest rates.
The Japanese yen rose 0.54% against the US dollar to around 145.40, recovering some of the significant overnight losses. The Bank of Japan is scheduled to hold a meeting next week.
The US dollar index, which measures six major currencies including the US dollar against the Japanese yen, fell 0.135% to 103.92.
The gold price slightly rose after hitting a three week low on the previous trading day, and is currently trading around $1985.
US crude oil prices rose 0.7% to $71.82 per barrel, while Brent crude oil prices rose 0.63% to $76.51.
