Tuesday’s US consumer inflation report will set the tone for the markets for the week. Economists expect core inflation to decline to 6.1% in November from a year earlier, down from a 6.3% rise the previous month.
However, the risk might be on the upside, following Friday’s data showed that producer prices rose at a faster pace than expected, fueling concerns that the CPI report might indicate that inflation is sticky and that interest rates may need to stay higher for longer.
Wall Street fell, Treasury yields rose and the dollar pared its earlier losses.
In Asia, MSCI’s broadest index of stocks in the Asia-Pacific region outside Japan fell 0.1% on Monday, following falling 2.6% last week – the biggest drop since late September.
The Japanese Nikkei plunged 0.5%, while the South Korea fell 0.7%. S&P 500 futures slipped 0.2%, while Nasdaq futures fell 0.3% as caution prevailed overall.
“This week the markets might go anywhere… A higher CPI – say 6.4% (and beyond) and a series of hawkish points from the Fed and a statement from Powell might prompt funds exit for 2022 – risk extends to 2023 and funds buy back short USD positions,” said Chris Weston, head of research at Pepperstone.
“It would be a big surprise if we didn’t see the Fed return to a 50bp hike… We also want to understand if Jay Powell is opening the door to a slowdown at a 25bp rate hike from February – once more, while in line with market pricing, this might be seen as closer to the end of the up cycle and is a modest negative for the dollar.”
Fed policymakers are widely expected to hike rates 50 basis points on Wednesday in their last meeting of the year, to a range of 4.25% to 4.50%, which would mark a slowing pace of hikes. rate.
Futures also show the terminal rate will peak at 4.961% next May and then decline to 4.488% by December 2023 as markets priced in cuts from the Fed due to the slowing US economy. .
Along with the Fed, the European Central Bank and the Bank of England are also expected to announce interest rate hikes as policymakers continue to curb growth to stem inflation.
In the currency market, the US dollar rose 0.1% once morest a basket of currencies at 105.01, although not far off the five-month low of 104.1 a week ago.
The British pound fell 0.2% to $1.2242, while the Aussie slipped 0.19% to $0.6783.
Treasury yields remained broadly flat on Monday following hitting three-month lows in the previous session.
The yield on the benchmark 10-year Treasury notes held steady at 3.5875%, compared to its US close of 3.5670%. The two-year yield touched 4.3610%, up slightly from its US close of 4.330%.
The yield curve remains inverted around -77bps, suggesting a possible US recession in the near future.
In the oil market, prices rose more than 1% following falling to their lowest level of the year due to fears of a global recession.
West Texas Intermediate (WTI) crude oil futures jumped 1.4% to $72.03 a barrel, while Brent crude settled at $77.15 a barrel, also up 1, 4%.
Spot gold was down slightly, trading at $1,796.04 an ounce.
