TODAY’S NEWS

Asian shares surged on Monday thanks to a benign reading on U.S. inflation that restored hopes for potential policy easing next year. There was also relief that Washington managed to avoid a government shutdown.

With last week’s central bank decisions behind, the current week is much quieter with only the minutes of a few of those meetings due and limited US data release. There are no Federal Reserve speeches, leaving markets to focus on broader themes like the dollar’s strength and rising bond yields.

The robust US dollar, driven by economic resilience and higher bond-yields, continues to challenge commodity prices and gold, while pressuring emerging market currencies. Governments in these markets have been intervening to prevent excessive depreciation, which could exacerbate inflation.

Market Performance

The positive sentiment from the US inflation report lifted MSCI’s broadest index of Asia-Pacific shares outside Japan by 0.3%, Japan’s Nikkei by 0.7%, and South Korea’s Kospi by 0.9%.

S&P 500 futures rose 0.3%, while Nasdaq futures gained 0.4%. The S&P 500 fell almost 2% last week and the Nasdaq 1.8%, though the latter is still up 30% for the year.

Despite last week’s losses, the S&P 500 remains up 23% for the year, though Bank of America analysts cautioned that gains are heavily concentrated in the 12 largest companies. Excluding these, the S&P 500’s rise shrinks to 8%.

Wall Street had rallied on Friday due to a softer-than-expected core US inflation reading of 0.11%, providing a partial antidote to the Fed’s hawkishness earlier in the week.

Bond Yields and Policy Outlook

Fed funds futures rally indicates a 53% chance of a rate cut in March and 62% in May, with only two quarter-point reductions expected in 2025, bringing rates to 3.75 – 4.0%. A few months ago, the market had hoped rates would bottom around 3.0%.

Expectations of fewer cuts and increased government borrowing have pressured bond markets. US 10-year Treasury yields have risen sharply by almost 42 basis points in just 2 weeks – the largest jump since April 2022.

“The recent firming in core inflation has interacted with a rising threat of tariffs and immigration restrictions to temper the Fed’s inflation optimism,” noted JPMorgan economist Michael Feroli.

“Given our inflation and unemployment rate forecasts, we continue to look for 75bp of cuts next year with a hold in January and a quarterly cadence thereafter.”

Currency and Commodity Markets

The dollar index remained near two-year highs at 107.970, with the euro trading weakly at $1.0432 and having again tested support around $1.0331/43 last week.

The dollar was firm at 156.44 , having gained 4.5% so far in December, but faces more threats of Japanese intervention should it challenge the 160.00 barrier.

The strong dollar and rising bond yields have weighed on gold, which changed hand at $2,624 an ounce after slipping 1% last week. Oil prices also faced headwinds from dollar strength and concerns over Chinese demand. Brent crude edged up by 4 cents to $73.00 a barrel, while US crude gained 12 cents to $69.58 per barrel.

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