Asian equities may experience a period of consolidation as market participants brace for a dynamic week marked by significant macroeconomic events. The agenda kicks off with the release of the U.S. Consumer Price Index today, followed by China’s Activity data on Wednesday, a crucial meeting between President Biden and President Xi, and looming U.S. government shutdown concerns on Friday, November 17th. Anticipation of these events may prompt a defensive market stance today, particularly if there is a perceived risk of an elevated U.S. Consumer Price Index. Such an outcome could trigger a hawkish repricing across the U.S. curve, affecting all risk assets.
A pivotal indicator of risk sentiment is the USD and major pairs in the FX markets. The ongoing activity-packed week is expected to sustain higher trading volumes, leading participants to adjust their hedging positions before and after key events. It’s noteworthy that the Yen remained stable following suspected intervention, briefly causing USD/JPY to dip as it approached 152. The pair could gain renewed attention in today’s session as traders are increasingly positioning and hedging for a monetary policy pivot from the Bank of Japan.
The spotlight is firmly on the U.S. Consumer Price Index (CPI), with multiple Fed speakers scheduled for later today. Desks predict a 0.3% month-on-month increase in core CPI for October, mirroring September’s rate. The annual core inflation rate is forecasted to hold steady at 4.1% year-on-year, influenced by stable energy prices and potential declines in vehicle prices. This data holds significant sway over the Federal Reserve’s future policy direction. A miss, especially in the less volatile core inflation component, might lead traders to believe the Fed could refrain from further interest rate hikes. Conversely, a beat in the data could prompt a noticeable repricing on the short-term U.S. interest curve, offering dovish pricing in the Short-Term Interest Rate Futures (STIRS).
If the data leans towards a hawkish reading, the long end of the U.S. Treasury curve may encounter headwinds. Growing concerns about the U.S. Treasury supply-demand dynamics, driven by rising borrowing costs, could cast shadows on the fiscal outlook of the U.S. Adding to this, Moody’s downgraded the U.S. credit outlook to negative ahead of Friday’s budget deadline, although this development quickly faded in terms of market impact. While market sentiments currently lean towards a dovish reading, any unexpected hawkish repricing could dampen global equity market risk appetite heading into year-end, potentially affecting the anticipated Santa Rally.
