Asia-Pacific benchmarks started the week well as investors caught a case of new-found Federal Reserve rate cut fever and positioned themselves ahead of possible tweaks to China’s key benchmark lending rates.
The People’s Bank of China (PBOC) is widely expected to keep its benchmark lending rate at record lows on Monday. This decision is in line with the central bank‘s ongoing efforts to inject liquidity into the economy and provide support during economic challenges.
Trading activity and volumes in Asia are expected to be lighter than usual this week due to the U.S. Thanksgiving holiday later in the week. However, sentiment seems to be holding up well, supported by a general easing of financial conditions. Easing financial conditions can have a positive impact on market sentiment by lowering borrowing costs and supporting risk assets. And for the most part, investors continue to ride the bullish wave as cash flows into equity markets.
The story is different in the oil markets, where managed money has fallen to a 4-month low ahead of the OPEC meeting. Oil markets are trading quietly ahead of the OPEC meeting as there is a palatable sense of uncertainty among Asian bulls. While the baseline forecasts are coalescing around the idea that the existing group production cuts will remain in place in 2024 and that the unilateral Saudi 1mb/d cut will be extended to 2024Q2, the key question is whether OPEC+ will make deeper cuts given the rise in non-OPEC production.
It’s a short trading week in the United States as Americans prepare to gather with family and guests and indulge in festive meals. The celebration commemorates a time when their ancestors were rescued by local communities who showed compassion and saved entire settlements of hapless settlers from the harsh realities of the harsh North American winter.
This week in the markets is predictably in line with Wall Street behavior. A few senior traders will be at work on Monday and Tuesday, while Wednesday will see widespread travel. On Friday, for reasons that are not entirely clear, the markets will be open, potentially setting the stage for a sell-off into thinly traded conditions, especially if unforeseen issues arise, such as concerns over the Omicron variant.
On the fundamental front, the highlight of the week will be the November Federal Open Market Committee (FOMC) minutes released on Tuesday. While they could be described as stale, their relevance has only increased in recent weeks. The discussion of financial conditions is particularly pertinent now, given the Federal Reserve’s decision to skip the final rate hike implied by the September dot plot, citing the belief that tighter financial conditions resulting from the sell-off in the long end of the Treasury curve could serve as a proxy for a rate hike. However, a series of soft data releases, including payroll and CPI numbers, have offset a significant portion of the tightening in financial conditions cited by the Fed.
Recall that the post-CPI rally in stocks and bonds and the associated dollar weakness contributed to the largest easing in market-based financial conditions in a year. The term premium has now narrowed to just 7 basis points, well below the 48 basis points at last month’s highs.
During Jerome Powell’s press conference earlier this month, he mentioned that for market-based financial conditions to influence monetary policy decisions, any tightening impulse must be “persistent”. Both Goldman’s Financial Conditions Index (FCI) gauge and the term premium have retraced about half of the tightening observed from July through mid-October. This tightening is now seen as “transitory”.
While the Fed is likely pleased with the evolving data, the minutes will be scrutinized in the context of easier financial conditions since the meeting and a more favorable macro environment that supports the soft landing narrative. Investors who do not “travel” early for Tuesday’s release of the minutes will attempt to gauge the extent to which the November meeting indicated the Committee’s inclination to hike again if the tightening of financial conditions were to reverse. Such analysis may prove futile.
Other notable events in the U.S. this week include existing home sales, which are expected to show a decline in October, marking the fifth consecutive monthly decline and the 19th in 21 months. The final reading of the University of Michigan Sentiment is due on Wednesday, with investors looking for a downward revision to the highest reading of longer-term inflation expectations since 2011. Additionally, flash readings on S&P Global PMIs for November will be released on Black Friday.