Asia Markets Cautious Ahead of BOJ Meeting and US Inflation Data

Asian stock markets experienced a slight downturn at the start of the week, amid anticipations of potential policy adjustments from Japan’s central bank and upcoming U.S. inflation data. The Bank of Japan (BOJ) is set to meet on Tuesday, with discussions possibly hinting at a move away from negative interest rates. Although no immediate changes are expected at this meeting, economists predict that negative rates could be abandoned by April, positioning the BOJ as one of the few central banks tightening policies globally.

Barclays economist Christian Keller anticipates that the BOJ will await outcomes from the forthcoming ‘shunto’ wage negotiations in spring before making any policy adjustments. The Japanese Nikkei index saw a 0.7% decrease, partly due to the strengthening yen, while MSCI’s broadest index of Asia-Pacific shares outside Japan fell by 0.3%.

South Korea’s main index showed a marginal gain of 0.3%, unaffected by reports of North Korea launching a ballistic missile. Chinese blue chips, on the other hand, declined by 0.3% after consecutive weekly drops.

In the futures market, S&P 500 futures saw a modest rise of 0.3%, and Nasdaq futures increased by 0.2%. However, EUROSTOXX 50 futures and FTSE futures experienced slight declines.

The U.S. will soon release data on the core personal consumption expenditure (PCE) index, which analysts predict will showcase a 0.2% rise in November, with annual inflation potentially slowing to 3.4%—the lowest since mid-2021. This anticipated slowdown in inflation has led to market speculations about the Federal Reserve’s potential policy easing.

Despite New York Fed President John Williams’ remarks about the lack of discussions on policy easing, market expectations remain largely unchanged. Currently, Treasury yields and Fed fund futures suggest the possibility of rate cuts as early as March, with substantial easing expected throughout 2024.

Goldman Sachs analysts foresee a series of rate cuts by the Fed, starting in March, which could lead to a terminal rate of 3.25-3.5%. This scenario could enable Asian central banks to initiate easing measures sooner than anticipated.

The anticipation of rate cuts in the U.S. has weakened the dollar against a basket of currencies. The euro is currently trading at $1.0909, while the dollar has weakened against the yen, trading at 142.23. The softer dollar and yields have positively impacted gold prices, though they remain below recent highs.

Oil prices are attempting to stabilize after reaching five-month lows last week. Brent crude has increased slightly to $77.02 a barrel, and U.S. crude has risen to $71.90, supported by reduced Russian exports and attacks in the Red Sea.

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