Santa Rally? Ho Ho Ho – A Report by Reuters

By Jamie McGeever

Asian Markets Outlook

Investors are often cautioned against opposing the Federal Reserve, yet some continue to learn this lesson through experience. When the second most influential central bank aligns with the Fed, market turbulence is almost inevitable.

This was evident last week, as Wall Street and global stock markets were engulfed in red following interest rate hikes of 50 basis points by both the Federal Reserve and the European Central Bank, accompanied by unambiguous indications that they are not finished yet.

Although the Fed may be closer to concluding its rate-increasing cycle compared to the ECB, rate markets are still anticipating a possible shift from Fed Chair Jerome Powell next year, despite his firm assertions to the contrary.

Concerns regarding a U.S. recession and a global economic slowdown intensified on Friday with the release of the weakest U.S. PMI data in over two years. Earlier that week, disappointing figures for U.S. retail sales and various Chinese economic indicators added to this unease.

This raises a critical question: Is this the economic environment in which central banks worldwide should continue to raise interest rates?

The upcoming week in Asia is likely to be significant, with key events including monetary policy decisions in Japan and Indonesia, the release of minutes from the Reserve Bank of Australia’s last meeting, and inflation data from Japan, Hong Kong, Malaysia, and Singapore.

The Bank of Japan is anticipated to maintain its key lending rate at -0.10% and reaffirm its commitment to capping the 10-year government bond yield at 0.25%. However, in a noteworthy shift from recent decades, more hawkish perspectives are emerging within the BOJ as Governor Haruhiko Kuroda approaches the end of his term in March.

These decisions come just days ahead of the release of November’s inflation figures, with annual core CPI inflation expected to slightly rise to 3.7% in November from 3.6% in October, marking a new 41-year high.

Additionally, reports indicate that the Japanese government is expected to amend a decade-old joint statement with the BOJ, which originally committed the central bank to achieve a 2% inflation target "at the earliest date possible," allowing for greater flexibility regarding this goal.

In Indonesia, Bank Indonesia is likely to adopt a similar approach to the Fed, reducing the pace of rate hikes to 25 basis points following three consecutive increases of 50 basis points. Analysts predict the seven-day reverse repo rate will increase to 5.50% from 5.25%.

As a challenging year comes to an end, one wonders if there will be a Santa rally, or even a brief uptick, in the week leading up to Christmas.

Three key developments to watch for market direction on Monday include:

• German Ifo index (December)
• Remarks from ECB’s de Guindos
• U.S. NAHB housing market index (December)