Asian equities may experience positive momentum from Wall Street, as they shake off earlier losses caused by a slight increase in the U.S. Consumer Price Index (CPI) for November. The market rally was bolstered by a successful 30-year US Treasury bond auction and anticipation of the Federal Reserve’s policy announcement. A robust dollar against high-beta currencies and cautious outlook regarding China, helped oil prices decline, reaching their lowest since June due to ongoing demand concerns. This trend could impact cyclical sectors, despite the overall optimistic risk sentiment from the U.S. It’s important to monitor whether risk assets begin to diverge, especially as Emerging Market assets are currently underperforming. In China, the government plans to boost spending and monetary support in 2024 to strengthen the economy amid global uncertainties.
However, the day’s focal point is the Federal Reserve’s policy decision. While the rate decision is significant, the release of the Summary of Economic Projections (SEP), especially the ‘Dot Plot’, is critical, as market participants, leaning towards a dovish outcome, seek hints of potential rate cuts in 2024. Notably, despite quicker-than-expected progress in reducing inflation and signs of economic deceleration, a strong labour market might constrain any major downward revisions in the Fed’s interest rate forecasts. The Fed may adjust its end-of-2024 policy rate estimate to around 4.9%, with the possibility of an initial rate cut in the first half of the year. Equity markets and gold prices warrant close observation for immediate reactions to any dovish or hawkish signals from the meeting. With market positioning favouring strong dovish guidance, the Fed’s decision and subsequent commentary from Chair Powell could lead to significant volatility and uncertainty.
