Asian stocks decline, and the dollar strengthens ahead of a central bank rate hike.
As markets awaited a flurry of interest rate announcements from the U.S. Federal Reserve, the European Central Bank, and others, Asian stocks declined and the dollar strengthened on the first day of a busy week.
Caution is anticipated to spread to European markets, with Euro Stoxx 50 futures falling 0.5%, German DAX futures falling 0.5%, and FTSE futures falling 0.2%.
Futures for both the S&P 500 and the Nasdaq fell 0.1%.
Related: Inflows of foreign money into Asian stocks are at their highest level in two years.
In Asia, the broadest index of Asia-Pacific equities excluding Japan on the MSCI fell 1.2%, wiping away almost all of the previous week’s gains due to hopes that China is finally opening its economy with the breakdown of its zero-COVID policy.
Japan’s Nikkei eased 0.2%.
Chinese blue-chip stocks fell 0.9%, while Hong Kong’s Hang Seng index fell 2.2%, as investors’ attention switched from COVID-19 restrictions to the virus outbreak that is now affecting the economy.
On Friday, Wall Street fell, Treasury yields rose, and the dollar recovered some of its earlier losses.
Tuesday’s U.S. consumer price index (CPI) report will set the tone for the week’s markets. Economists anticipate that core annual inflation will decline to 6.1% in November, down from 6.3% in October.
Friday’s data revealed that producer prices rose more than anticipated, fueling concerns that the CPI report may signal inflation is sticky and that interest rates may need to remain higher for longer.
“A hotter CPI — say, 6.4% and above — and a hawkish set of dots from the Fed and Powell’s comments may see funds call it a day for 2022—risk leaks into 2023 and funds buy back USD shorts,” said Chris Weston, head of research at Pepperstone.
“It would be quite surprising if the Fed did not reduce its rate hike by 50 basis points… We also want to know if Jay Powell opens the door to a slowdown to a 25 bp hiking pace beginning in February. While this would be in line with market pricing, it may be interpreted as a sign that the Fed is nearing the end of its hiking cycle, which would be a minor USD negative.
At its final meeting of 2022, the Federal Reserve is widely expected to raise interest rates by 50 basis points on Wednesday, though attention will also be paid to the central bank’s updated economic estimates and Fed Chair Jerome Powell’s press conference.
Kevin Cummins (NYSE: CMI), chief U.S. economist at NatWest, opined that any surprise in the CPI report was unlikely to sway the Fed away from a 50-basis-point rate hike but would have a greater impact on the policy statement and tone of Powell’s press conference.
“As is typically the case, the updated dot plot and terminal (peak) rate estimates will be much more important to the policy outlook than this week’s near-term action,” said Cummins. “Chair Powell will emphasise this theme in his prepared remarks and press conference.”
The European Central Bank (ECB) and the Bank of England (BoE) are also expected to announce interest rate hikes on Thursday, with both likely to increase rates by 50 basis points as authorities continue to restrain growth in an effort to combat inflation.
On currency markets, the U.S. dollar rose 0.1% against a basket of currencies to 105.17, although it was only a week removed from its five-month low of 104.1.
Related: Asian stocks rise on hopes that rate hikes will slow down and that China will reopen.
The British pound declined 0.3% to $1.223, while the Australian dollar fell 0.3% to $0.6759.
On Monday, Treasury yields remained basically unchanged. Compared to its U.S. closing price, the yield on benchmark 10-year Treasury notes remained at 3.560%. The yield on the two-year note reached 4.338%, a modest increase from its U.S. closing of 4.330%.
On the oil market, prices increased due to uncertainty surrounding the restoration of a vital pipeline supplying the United States and Russia’s promise to curtail production in response to a Western export price cap.
Brent crude prices rose 0.6% to $76.58 per barrel, while U.S. West Texas Intermediate crude futures rose 0.8% to $71.68 per barrel.
The spot price of gold fell 0.6% to $1,785.78 per ounce.