Asian shares fell and the dollar strengthened on Monday as markets awaited interest rate decisions from the U.S. Federal Reserve, the European Central Bank, and other central banks.
The caution is expected to affect European markets, with pan-region Euro Stoxx 50 futures down 0.5%, German DAX futures losing 0.5%, and FTSE futures 0.2% lower. Both the S&P 500 and Nasdaq futures dipped 0.1%.
In Asia, MSCI’s broadest index of Asia-Pacific shares outside Japan fell 1.2%, wiping out almost all of the previous week’s gains fueled by optimism over China’s move to open up its economy with the dismantling of its zero-COVID policy. Japan’s Nikkei declined 0.2%, while Chinese blue chips slipped 0.9%. Hong Kong’s Hang Seng index also dropped 2.2%, as investors focus shifted from easing COVID-19 restrictions to the rising number of infections and their impact on the economy.
On Friday, Wall Street stocks fell, Treasury yields rose, and the dollar trimmed earlier losses. The focus for markets this week will be on Tuesday’s U.S. consumer price index (CPI) report. Economists predict that core annual inflation will cool to 6.1% in November, down from 6.3% in the previous month. However, there is potential for upside risk after Friday’s data showed that producer prices had risen faster than expected, raising concerns that the CPI report may indicate persistent inflation and that interest rates may need to stay higher for longer.
An unexpectedly high CPI reading – above 6.4% – and a hawkish stance from the Federal Reserve and its Chairman, Jerome Powell, could lead investors to conclude that interest rates will have to stay higher for longer, said Chris Weston, head of research at Pepperstone. In this scenario, “risk bleeds into 2023, and funds buy back USD shorts,” Weston added.
The Federal Reserve is widely expected to raise rates by 50 basis points at its last meeting of 2022 on Wednesday, but investors will also be paying close attention to the central bank’s updated economic projections and Powell’s press conference. A slowdown in the pace of rate hikes from February, while in line with market expectations, could be seen as a sign that the end of the hiking cycle is near and could be a modest negative for the dollar.
Kevin Cummins, the chief U.S. economist at NatWest, said that any surprises in the CPI report are unlikely to deter the Federal Reserve from raising interest rates by 50 basis points, but could influence the policy statement and Powell’s tone during the press conference.
“As is often the case, the updated dot plot and terminal (peak) rate estimates will be even more critical to the policy outlook than the near-term action this week – a theme Chair Powell will focus on in his prepared remarks and press conference,” Cummins said. In addition to the Fed, the European Central Bank and the Bank of England are also set to announce interest rate hikes on Thursday, with both expected to raise rates by 50 basis points as policymakers continue to curb growth to combat inflation.
In currency markets, the U.S. dollar edged 0.1% higher against a basket of currencies to 105.17 but remained close to the five-month low of 104.1 reached last week. The British pound fell 0.3% against the dollar to $1.223, while the Australian dollar also slipped 0.3% to $0.6759.
Treasury yields were largely unchanged on Monday. The yield on benchmark 10-year Treasury notes was steady at 3.5600%, compared with its U.S. close of 3.5670%. The two-year yield touched 4.338%, slightly up from its U.S. close of 4.330%. In the oil market, prices rose amid uncertainty over the restart of a major U.S. pipeline and Russia’s threat to cut production in response to a Western cap on its exports.
Brent crude futures rose 0.6% to $76.58 per barrel, while U.S. West Texas Intermediate crude was at $71.62 per barrel, up 0.8%. Spot gold was 0.6% lower at $1,785.78 per ounce.
