A look at the day ahead in the U.S. and global markets from Mike Dolan
Despite timid resistance from central banks to what some saw as overblown rate cut bets for next year, U.S. markets retained the warm holiday glow of impending credit easing – with a watchful eye on the Bank of Japan.
The BOJ is the last of the G4 central banks to make its final policy decision for 2023 this Tuesday – and also the one that is most out of step. Aside from last week's rate cuts and winks from the Federal Reserve and others, there is still a slim chance that the BOJ could tighten monetary policy this week.
While most expect the exit from negative interest rates to be delayed until April, the central bank has been adjusting its yield curve caps throughout the year, could nuance it again, and pressure from business lobbies to tighten policy soon “normalize” is increasing.
That background risk clouded Japanese stocks on Monday, and markets in Asia were generally lower amid renewed declines in indices in China and Hong Kong. However, the yen, which rose sharply against the dollar last week on emerging Fed easing hopes, fell back slightly today.
And yet, after snapping their longest weekly winning streak in six years last week and finding themselves either at or just shy of record highs, Wall Street stock futures appeared set to maintain momentum heading into the new week.
Despite attempts by Fed officials on Friday to temper bets on market easing, futures markets are still seeking rate cuts of up to 150 basis points in 2024 starting in March – twice as much as Fed policymakers announced last week have.
New York Fed chief John Williams said it was premature to talk about rate cuts yet. Atlanta Fed chief Raphael Bostic told Reuters he sees no easing until the third quarter and only two rate cuts during the year.
Still, optimism is hard to contain as recent economic data shows a mixed picture for manufacturing and industry.
Ten-year Treasury yields fell below 3.90% early Monday, about 34 basis points lower than this time last week. Two-year yields of 3.4% also fell more than 30 basis points last week.
The story goes on
A key week for U.S. housing data begins Monday with the December NAHB survey of U.S. homebuilders, with PCE inflation updates and a 20-year Treasury auction also in focus.
A similar picture emerged in Europe, where markets are also betting on the European Central Bank to ease monetary policy by 150 basis points next year – starting in April – and 10-year Bund yields test 2% for the first time since March .
Even as business morale in Germany unexpectedly deteriorated in December, according to the latest Ifo Institute survey, ECB officials have emulated their Fed counterparts in discouraging markets from expecting interest rate cuts before mid-year.
ECB policymaker and Slovenian central banker Bostjan Vasle reiterated that message on Monday, saying the ECB would need at least until spring before it could reassess its policy outlook and that market expectations for a rate cut in March or April were excessive.
As a result, the euro was quoted slightly higher on Monday. The dollar was more mixed overall – speculators' net positioning of the dollar against G10 currencies turned negative for the first time since September.
Crude oil prices fell amid broader concerns about global demand and despite rising concerns about shipping in the Red Sea.
Key developments that should give US markets more direction later on Monday:
* NAHB December Housing Index, December New York Fed Services Survey
* Austin Goolsbee, President of the Chicago Federal Reserve; The speakers will be the chief economist of the European Central Bank Philip Lane and ECB board member Isabel Schnabel
* The US Treasury is auctioning 3- and 6-month bonds
* US corporate earnings: Ark Restaurants, Quipt Home Medical
(Editing by Bernadette Baum)
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