Stock Market Today: Asian Shares Are Mostly Lower Ahead of Key US Inflation Data

The Federal Reserve (Fed)’s decision to cut rates by 25bp was fully meaningless and the incoming data is a proof. The US Q3 growth was revised to 3.1% from 2.8% printed earlier, the sales growth was revised higher from 3 to 3.3% and core PCE priced – though lower than the quarter before – was also revised slightly higher to 2.20%, raising worries that even the two rate cuts from the Fed next year would be too much.

As such, the early gains were given back and the S&P500 and Nasdaq closed in the negative, the Dow Jones was flat while small and mid cap stocks saw no appetite either. Sharing the headlines with Powell, Trump threatens people of his own party to dump a bipartisan deal and risk a government shutdown if they don’t push to raise or suspend the national debt limit under Biden, so he can spend wholeheartedly when he comes to office. The US yield curve is steepening, investors are not willing to buy longer-dated maturities on prospects of higher long-term inflation and ballooning debt. And the US dollar advances toward the strongest levels in more than 2 years leaving other majors under the shadow before Xmas.

The EURUSD failed to stay above the 1.04 mark yesterday and is struggling to hold ground near the 1.0350 level, the Stoxx 600 is racing toward the 500 support, while Cable settles below the 1.25 mark on the back of a dovish no-change that the Bank of England (BoE) delivered at yesterday’s MPC meeting. Three MPC members instead of two (expected by analysts) voted to cut the rates at this week’s meeting. The other six opted for no change – wary of reigniting inflation as the government prepares to increase spending to boost growth, and as Trump threatens the world with eye-watering tariffs. Interestingly, Governor Andrew Bailey – who is clearly not the most popular central banker – had the merit of sounding rational yesterday by saying that the ‘world is too uncertain’ to commit to cut borrowing costs in February. War, Trump, climate change – there’s too much happening for anyone to claim they see the future with clarity. But one good news for the UK is that the United Kingdom is not as concerned as – say the EU, China, Canada and Mexico – by the Trump tariffs and the latter could help the British assets cope with Trump better than their peers. British stocks trade with around 40% valuation discount compared to the MSCI World peers, it has one of the fastest dividend growth among the European and American indices and they returned 10% to their investors these years including reinvested dividends. If inflation U-turns as geopolitical and trade tensions worsen, the FTSE 100 stocks will be in a good position to benefit from these developments.

Elsewhere – and this is amusing – inflation in Japan accelerated in November. The headline figure climbed back to 2.9%, the highest in three months, while core inflation advanced to 2.7%, also a three-month high. Why is this funny? Because just yesterday, the Bank of Japan (BoJ) decided to pass on a rate hike, with officials seemingly too cautious to act amid uncertainties over Trump-era policies and geopolitical tensions. Meanwhile, Japan’s interest rate sits at 0.25%, while inflation is running near 3%. The Japanese have a different relationship with inflation – they don’t despise it as much as we do. After all, decades of deflation, which is far harder to reverse, have shaped their perspective – a lesson the Chinese are now learning the hard way. But the BoJ’s decisions still feel illogical, as they don’t align with a conventional policy framework. Consequently, the USDJPY is giving back some earlier gains on the stronger-than-expected inflation figures and speculation that rising inflation might prompt BoJ action. However, since the BoJ doesn’t really tie interest rates to inflation, the USDJPY has room for further gains, especially as the US dollar continues to strengthen broadly.

In China, the People’s Bank of China (PBoC) kept its policy rates unchanged today – as expected – although the officials are now committed to put in place ‘more proactive fiscal measures’ and ‘moderately loose’ monetary policy. For now, none of these legs have been enough to bring investors back on board. The Chinese CSI 300 is preparing to close the week on a meagre note.

In focus today

In the euro area, we get data on consumer confidence for December. Consumer confidence has been on a rising trend the past two years but in November it unexpectedly declined. It will be very import for the growth outlook to see if the decline was just a blip or it continued in December as we expect private consumption to be the main growth driver in 2025.

From the US, November Private Consumption Expenditures (PCE) are due for release today, including the Fed’s preferred measure of inflation. The CPI measure released earlier pointed towards relatively steady inflation pressure in November.

In the US, we will also keep an eye on Congress, which will have to find a deal to avoid a government shutdown, after the House of Representatives voted down the latest version of a funding bill last night.

In the Nordics, we will look out for consumer and business sentiment in Sweden and Denmark.

We also get retail sales, wage data and PPI inflation in Sweden.

Economic and market news

What happened overnight

Japanese November CPI inflation excl. fresh food increased to 2.7% from 2.3% in October. Core inflation increased to 1.7% from 1.6. The underlying price pressure has been stronger in H2 and largely aims with the 2% inflation target. The unwillingness from the BoJ to raise rates further stems from a worry that wage growth will fade in the spring leaving price pressures back where they have been for decades, close to zero. This has added further to downward pressures on the yen triggering verbal intervention from the Japanese finance minister and top currency diplomat.

What happened yesterday

The Riksbank cut the policy rate by 25bp to 2.5% as widely expected but the signals for the future were more hawkish as the Riksbank expects only one more cut during H1 2025. In the rate path, the implied probability is rather evenly distributed between the January and March meetings, but with the overall communication saying they will have “a more tentative approach” and “carefully evaluate the need for future interest rate adjustments” it seems more likely than not that the Riksbank is ready to pause in January, in our view. We therefore have adjusted our call and now expect 25bp cuts in March and June, resulting in an end point of 2.00% (previously 1.75%). At the press conference, Thedéen commented that current policy is likely somewhat stimulative and that once the policy rate reaches 2.25% by Q1 next year, the risks are actually balanced putting an equal probability between cuts and hikes from there. We firmly believe there are more downside risks to the Riksbank’s main scenario.  We now expect two cuts in March and June to 2.0% (previously 1.75%), 19 December.

Also in Sweden, there are plenty of interesting data. We start off with retail sales data for November, and here we will hopefully see more signs of the long-awaited recovery for household consumption. We also get wage data for October and PPI data for November, where the latter will likely see a rise due to higher energy prices (all released at 8.00 CET). At 9.00 CET, we will get a new set of NIER confidence data, and here we also expect to see a continued improvement in sentiment among both households and manufacturing sector. As always, attention will also be on price expectations and hiring plans. NIER will also release new set of economic forecasts at 9.15 CET.

Norges Bank left policy rates unchanged in a decision widely expected by analysts and markets. Importantly the Norwegian central bank firmed its guidance towards a March 2025 rate cut – the first in the cycle – by presenting a rate path suggesting a close to 100% probability of a 25bp rate reduction conditioned on the central bank’s economic projections materialising. Norges Bank notably did not suggest that rates could be cut in January. Further out Norges Bank guided towards three cuts in 2025 although with an elevated risk of a fourth cut. We continue to pencil in the first cut in March alongside three additional rate cuts in 2025 and four cuts in 2026.

The Bank of England also agreed to keep rates unchanged as expected. The decision was taken with three board members voting for a cut, which was a surprise. That said, BoE continues to emphasise a gradual approach to reducing the restrictiveness of monetary policy. We think this supports our base case of the next cut coming in February and a quarterly pace after that.

FI: European curves steepened from the long end mirroring the US yields’ reaction to the FOMC meeting on Wednesday night. However, it was a gradual move through the day, thus it was with some delay that we saw the full effect. With the final central bank meetings of the year behind us, and only a few trading sessions left for the year, we expect a relative tight trading range in coming days, with focus on the supply announcements for next year. Yesterday, the French Tresór said that they plan to sell EUR300bn next year, which is unchanged from the October plan. BoE’s dovish tilt (6-3 split vote for unchanged) relative to market expectations sent UK yields somewhat lower on the day,  we stay positive GBP.

FX: As expected, the Riksbank lowered the policy rate by 25bp to 2.50% and indicated only one more cut in H1. A hawkish cut which strengthened the SEK and supported our call for tactical downside in EUR/SEK. EUR/SEK dropped some ten figures towards the lower end of 11.40’s before erasing some of the losses in the Asian session. Meanwhile, NOK/SEK was down 1.5 figures to below 0.9650. Norges Bank did not rock the boat, but the NOK traded on the defensive as focus shifts to the looming easing cycle that will probably start in March. The selloff in EUR/USD paused in the European session but as US trading opened the cross dived below 1.04 again and is now back close to 1.0350. The relentless selling of the JPY has continued, and USD/JPY was on the verge to break above 158. This morning Japan FM Kato expressed concerns and talked about appropriate action if there are excessive moves. Sterling was lower after Bank of England’s dovish voting split to keep rates unchanged.

The EUR/GBP cross drifts higher to near 0.8300 during the early European session on Friday. The Pound Sterling (GBP) weakens after the downbeat UK Retail Sales data. 

Data released by the Office for National Statistics on Friday showed that UK Retail Sales rose 0.2% MoM in November versus a 0.7% decline in October. This figure came in below the market consensus of a 0.5% increase. On an annual basis, Retail Sales climbed 0.5% in November, compared to a rise of 2.0% (revised from 2.4%) prior, missing the estimation of 0.8%. The GBP attracts some sellers in an immediate reaction to the downbeat UK Retail Sales and acts as a tailwind for the EUR/GBP cross. 

On the Euro front, the European Central Bank (ECB) is likely to continue to lower its key interest rate next year. The ECB Governing Council member Gediminas Simkus said on Thursday that the central bank should keep lowering borrowing costs at the current pace as inflation is increasingly under control. ECB President Christine Lagarde said ECB policymakers would keep cutting interest rates if forthcoming inflation data aligns with anticipations.

The ECB will hold its first rate-setting meeting of 2025 on January 30. Investors envisage a slightly more aggressive path of the ECB easing cycle next year, which might weigh on the Euro against the GBP.

Source: FXSTREET

Why did the team downgrade its STOXX 600 target prices for the next year?

What sectors are you optimistic about?

Do lower rates also benefit smaller companies rather than bigger ones?

How might exchange rates impact European stocks?

In terms of economic performance, which region is most important for European companies: the US, the EU, or China?

How do you think lower interest rates and inflation will impact European stocks?

How has the strong performance of US equities impacted European stocks?

Korea's financial authorities said on Friday they would loosen foreign exchange regulations and allow more corporate borrowings abroad, in a bid to defend the won that is trading at a 15-year low with improved liquidity.

"Strict regulations restrain the efficiency of foreign exchange management, and there is a need to take into account worsened foreign exchange liquidity conditions after recent events," the finance ministry said in a joint statement with the central bank and regulatory agencies.

The Korean won dropped on Thursday to its weakest level in 15 years, weighed down by risk-averse sentiment after the U.S. Federal Reserve's cautious stance on more interest rate cuts, as well as domestic political uncertainty stoked by President Yoon Suk Yeol's short-lived martial law order on Dec. 3 and his subsequent impeachment.

According to the statement, measures include allowing companies to take out loans in foreign currencies and exchange the funds for the won, if they are used for investing in facilities such as equipment, property and land purchases.

"It is a paradigm shift in foreign exchange policy, from regulating external debt, to inducing more foreign inflows," a finance ministry official told Reuters by phone.

Traumatized by capital flight during the 1997-1998 Asian financial crisis and the 2007-2008 global financial crisis, Korea has had a tight grip on foreign exchange borrowings even as it has encouraged overseas investments.

At the end of September, the country held a record high of a net $977.8 billion in financial assets abroad, after turning a net creditor in 2014.

"We will continue to loosen regulations on capital inflows from the private sector unless it affects external debt or credit ratings in a negative way," the official, who did not wish to be identified because the person was not authorised to speak to media, said.

The ministry also said the ceiling of foreign exchange futures contracts would be raised to 75 percent of capital holdings for local banks and 375 percent for Seoul branches of foreign banks, from the current 50 percent and 250 percent, respectively.

"They are clearly tools for controlling the weakening pace of the local currency by easing the strain in foreign exchange liquidity," said Park Sang-hyun, an economist at iM Securities.

"But, there will be limitations, as unfavourable external conditions, from U.S. policy to China risks, are putting pressure on all emerging currencies, not just the won," Park said.

The ministry said it would implement the measures in a swift manner and consider expanding them after reviewing the effects. (Reuters)

Source: Koreatimes