Dovish Fed view courses through markets

A passerby walks past an electric monitor displaying various countries’ stock price index outside a bank in Tokyo, Japan, March 22, 2023. REUTERS/Issei Kato/File photo

Asian markets are poised to start the week on the front foot, emboldened by Wall Street’s late rally on Friday and plunge in U.S. rate expectations after Fed Chair Jerome Powell gave the clearest signal yet that the Fed is done raising interest rates and could soon move to cut them.

The S&P 500’s rise to its highest level this year, and continued loosening of financial conditions via the falling dollar and bond yields should pave the way for a positive open for Asian stocks and risk assets on Monday.

The dollar shed 3 percent in November, its biggest monthly fall in a year, and last week fell for a third week in a row. The two-year U.S. Treasury yield slumped 40 basis points last week – its steepest fall since March – and the implied rate on December 2024 ‘SOFR’ futures on Friday fell below 4 percent for the first time.

That packs a powerful punch. Many will argue that the U.S. bond and rates markets have gotten far too carried away, and that the Fed will not ease so quickly and aggressively next year.

But Fed policymakers are now in their ‘blackout period’ ahead of the Dec 12-13 policy meeting. This means there will be no guidance from officials to take the wind out of investors’ sails, certainly not on Monday, when the economic calendar is also very light.

There would appear to be room for Asian equities to bounce back – by some measures, the region’s underperformance has rarely been this bad in years.

The regional calendar highlights on Monday are New Zealand trade data and Australian inventories and corporate profit data, all for the third quarter.

Economists polled by Reuters expect New Zealand’s terms of trade to fall 1.9 percent on from the previous quarter, Australian inventories to fall 0.6 percent, and export volumes to slide 3.8 percent.

The economic and policy calendar for the rest of the week has plenty more potential market-moving moments, including interest rate decisions from Australia and India, inflation figures from South Korea, the Philippines and Thailand, and GDP from Japan, Australia and South Korea.

On the policy front, the Reserve Bank of Australia on Tuesday is expected to keep its cash rate on hold at a 12-year high of 4.35 percent, according to 28 of 30 analysts polled by Reuters. The other two are going for a 25 basis point hike.

New Zealand’s central bank surprised markets last week with the hawkish rhetoric that accompanied its decision to leave rates on hold, and the RBA could echo a similar message.

In stark contrast to the Fed, rates futures markets are barely pricing in any rate cuts from the RBA next year at all. Indeed, the chance of a hike in the coming months is greater than the chance of a cut, current pricing shows.

Here are key developments that could provide more direction to markets on Monday: New Zealand trade (Q3); Australia inventories, corporate profits (Q3), and  South Korea monetary base (November).