Asian stocks inched up, and the dollar hovered close to a five-month low as an impact of US rate cut expectations.
US inflation slowed down, making many believe the Federal Reserve might reduce interest rates in the coming months. The impact of US rate cut expectations reverberated through global markets.
Impact of US Rate Cut Expectations Resonates in Global Markets
Following a 3% increase last week due to Houthi attacks on ships disrupting global shipping and the ongoing Israel-Gaza conflict, oil prices showed a mixed trend.
Both Brent crude and US West Texas Intermediate crude experienced fluctuations, reflecting the complex impact of geopolitical events on the energy market.
With markets in Australia, Hong Kong, Britain, and Germany closed for Boxing Day, trading was thin on the day after Christmas.
The holiday-curtailed week is expected to witness limited market movements due to reduced activity.
Asia-Pacific Gains and Santa Claus Rally
Asia-Pacific shares, excluding Japan, saw a 0.48% increase, marking a potential 2% gain for the year after a 20% decline in 2022.
As another impact of US rate cut expectations, Japan’s Nikkei recorded a 0.16% gain and remains the top-performing major Asian stock market, boasting a 27% rise in 2023. Additionally, E-mini futures for the S&P 500 showed a 0.15% increase.
As investors continued to process data from Friday, it revealed a noteworthy development: US prices experienced a decline in November for the first time in over 3-1/2 years, emphasizing the resilience of the economy. The personal consumption expenditures (PCE) price index, a key measure of inflation, showed a decrease of 0.1% last month.
The ongoing easing of the core PCE deflator in November was seen as a strategic response to the impact of US rate cut expectations, as noted by Nicholas Chia, Asia macro strategist at Standard Chartered. He noted that thin liquidity conditions are expected to amplify the ‘Santa Claus rally’ in equities leading up to the year-end.
As the year concludes, stocks typically experience a robust phase known as the “Santa Claus Rally.”
China stocks experienced a 0.47% decline, influenced by weakness in semiconductor shares, while gaming stocks stabilized following announcements of share buyback plans by several companies.
Meanwhile, Hong Kong’s Hang Seng Index remained closed during this trading period.
Investors React to Federal Reserve’s Shift in Policy
Investors in the stock market have expressed optimism as an Impact of US rate cut expectations. Following its policy meeting on December 13, the Fed conveyed that it had completed its tightening cycle and hinted at the possibility of interest rate cuts in the upcoming year.
Currently, markets are indicating a 75% probability of a 25 basis points rate cut by the Fed in March, as per the CME FedWatch tool. This represents a significant increase from the 21% chance observed at the end of November.
Additionally, market expectations are pricing in over 150 basis points of rate cuts for the upcoming year.
Citi analysts noted that the Federal Reserve has adopted a proactive approach, making a substantial shift in rhetoric to ease financial conditions.
This change in stance, according to the analysts, is a response to a combination of decelerating core inflation and increasing worries about a recession.
Fed officials have transitioned from emphasizing a commitment to combating inflation with prolonged higher rates to reassuring markets that they will not persist with elevated rates for an extended period.
Dollar Hovers Near Five-Month Low, Yen Strengthens
Currency market movements were subdued in the thinly traded holiday period, and the dollar index hovered at 101.61, closely resembling its five-month low of 101.42 reached on Friday.
With a 1.8% decrease for the year, the index is on track to break its two-year winning streak.
The yen maintained stability at 142.27 per dollar, with recent strength attributed to the prospect of the Bank of Japan (BOJ) potentially concluding its ultra-easy policy in the coming weeks.
Notably, the Asian currency has risen by 4% this month, poised for a second consecutive month of gains against the dollar. However, for the year, the yen still shows a 7.8% decline against the greenback.
Bank of Japan Governor Kazuo Ueda stated on Monday that the likelihood of reaching the central bank’s inflation target was “gradually rising.” He added that the bank would contemplate policy adjustments if the prospects of consistently attaining the 2% target increased “sufficiently.”
In the commodities sector, US WTI crude futures saw a 0.33% increase, reaching $73.80 per barrel, while Brent futures stood at $79.33, showing a slight 0.08% decrease on the day. Additionally, spot gold experienced a 0.5% gain, reaching $2,064.02 per ounce.