12/26/2023

Asian shares rise, dollar weakens

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Key points:

  • US inflation fell in November for the first time in more than three and a half years.
  • Asian shares rose on Tuesday, with the dollar nearing a five-month low.
  • If the Fed does cut interest rates early next year, it could lead to further gains in Asian stocks and a weaker dollar.

Markets in the Asia-Pacific region climbed on Tuesday, while the US dollar edged towards a five-month low. This upward trend reflects growing expectations that the Federal Reserve will lower interest rates in early 2024, following a decline in US inflation.

Trading activity was muted on the day after Christmas, with several markets, including Australia, Hong Kong, Britain, and Germany, closed for the holiday. This subdued trading environment is likely to persist throughout the holiday week.

The broader Asia-Pacific stock market, excluding Japan, gained 0.48% on Tuesday, potentially setting itself up for a near-2% gain for the year after a 20% decline in 2022.

Japan’s Nikkei 225 index edged up 0.16%, maintaining its position as the best-performing major Asian stock market with a 27% gain in 2023. E-mini futures for the S&P 500 index also witnessed a 0.15% rise.

Market participants are still digesting data released on Friday, which revealed that U.S. prices declined in November for the first time in over three and a half years, highlighting the economy’s resilience.

The Personal Consumption Expenditures (PCE) price index, a key inflation gauge, fell 0.1% last month, further emphasizing the softening inflationary pressures.

Impact of Fed rates on Asian markets

Stock market participants expressed satisfaction with the Federal Reserve’s recent indications regarding interest rate projections. Following its policy meeting on December 13, the Fed conveyed that it had reached the culmination of its rate-tightening cycle and paved the way for potential rate reductions in the upcoming year.

Based on CME’s FedWatch tool, markets are now placing a 75% probability on the Fed lowering rates by 25 basis points in March, a significant increase from the 21% probability at the end of November. Furthermore, markets are anticipating a rate reduction of more than 150 basis points in 2024.

This shift in the Fed’s stance has been welcomed by stock market participants as it suggests that the central bank is acknowledging the weakening economic conditions and is willing to adopt a more accommodative monetary policy posture.

“The Federal Reserve has aggressively changed its rhetoric to push for significant easing in financial conditions.”

– Citi analysts said in a statement.

“The combination of slowing core inflation and growing fears of a recession has led Fed officials to shift their rhetoric away from committing to fight inflation with higher rates over the long haul and toward reassuring markets that they won’t hold out high rates for too long.”

Easing rates will likely lead to further declines in the dollar and, as a result, prospects for stronger Asian currencies. The Asian currency has witnessed a 4% rise in value this month, marking its second consecutive month of strengthening against the dollar. However, the yen has still experienced a 7.8% decline against the US dollar on a yearly basis.

Market momentum has slowed in the foreign exchange market amidst the holiday-induced subdued trading activity. The dollar index currently stands at 101.61, inching close to its five-month low of 101.42 reached on Friday. The index, down 1.8% for the year, is nearing the end of its two-year winning streak.

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