Fed Announcement and Expectations
The Federal Reserve takes center stage today as it announces its rate decision following the conclusion of its two-day policy meeting. Market expectations suggest that policymakers will maintain rates, undeterred by U.S. inflation figures that align with consensus forecasts. As a result, all eyes will be on Powell’s press conference and the Fed’s dot plot, which outlines the future policy trajectory.
Vishnu Varathan, head of economics and strategy at Mizuho Bank, commented on the forthcoming event, stating that “The December FOMC is poised to be short on action, given the consensus for no rate hike, but may nevertheless be big on drama.” Varathan further noted the potential impact of a refreshed dot plot accompanied by revisions to the summary of economic projections.
Investors currently anticipate the Fed to commence a monetary policy easing cycle in 2024, with a 75% probability of the first cut occurring as early as May, according to the CME FedWatch tool. These expectations have kept market sentiment positive, propelling U.S. stocks to new highs for 2023 on Tuesday.
Asian Markets Respond
Despite the positive sentiment in the U.S., the MSCI’s broadest index of Asia-Pacific shares, excluding Japan, experienced a slight decline of 0.2%. In contrast, the Nikkei in Japan recorded a 0.6% increase. China’s blue-chip stocks fell by almost 0.5%, while Hong Kong’s Hang Seng Index slid by 0.8%. Investors eagerly await indications of further policy support from Beijing.
U.S. Bond Yields and Currency Market
U.S. bond yields remained close to recent lows, with the two-year Treasury yield at 4.7245%, following its drop to a six-month low of 4.5400% earlier this month. The benchmark 10-year yield stabilized at 4.2006%, near its lowest level in three months. In the currency market, the U.S. dollar weakened, trading at $1.2558 against the British pound. British wage growth showed a significant slowdown, although it was still considered too rapid for the Bank of England to consider lowering interest rates. The dollar also bought 145.48 yen.
Expectations for the Bank of Japan
While investors globally anticipate central banks’ potential rate cuts next year, many in Japan predict a shift away from the Bank of Japan’s ultra-loose monetary policy.