Dollar drops, treasuries gain before US CPI data: Markets wrap

Treasury yields and the dollar fell before crucial US inflation data that investors will scrutinise for clues on the Federal Reserve’s next move on interest rates.

Stocks posted moderate moves, with Europe’s Stoxx 600 Index and US equity futures little changed. France’s blue-chip CAC 40 index was set to close at a record high. Among individual stocks, Nokia Oyj fell after cutting its longer-term profitability target and AstraZeneca Plc rose after agreeing to buy vaccine developer Icosavax Inc.

Asian shares were broadly higher, with Hong Kong’s equity gauges leading gains, as traders await decisions from a meeting of Chinese economic policymakers that may indicate how much stimulus to expect next year.

Tuesday’s US consumer price index will give Wall Street a sense of whether the disinflation trend is continuing, a day before the last scheduled Fed decision of 2023. The US central bank is widely expected to hold rates, with most market focus on whether it will try to temper policy easing expectations after investors’ aggressive dovish repricing.

A gauge of dollar strength slipped 0.2%. Treasuries rose across the curve, with 10-year yields falling four basis points to 4.20%.

As traders look forward to Thursday’s Bank of England rates decision, figures out Tuesday showed UK wage growth slowed at the sharpest pace in almost two years, a further sign that the labor market is cooling in response to a flagging economy. Monetary policy announcements are also due from the European Central Bank and in Switzerland and Norway that day.

The headline US CPI number for November is forecast to decline to 3.1%, the lowest reading since the June print released in July, which coincided with this year’s lowpoint for the dollar. Core inflation is seen cooling to just below 3% in the first half of next year, according to Bloomberg Economics. Such a scenario would help pivot the Fed to an easing stance.

“Short-term inflation expectations have come down sharply on lower energy prices in recent months,” said Anna Wong and Stuart Paul of Bloomberg Economics. “That makes more room for the Fed to consider rate cuts as downside risks for activity and upside inflation risks become more balanced.”

In China, the 2023 Central Economic Work Conference is expected to end Tuesday. The meeting will likely indicate a more proactive role for fiscal policy, including more front-loading of funding and strengthening implementation to improve policy efficacy, according to Bloomberg Economics.

Bank of Japan

Meanwhile, the yen rebounded from its biggest decline in more than a month Monday that was triggered by a report saying Bank of Japan officials see little need to rush to scrap negative interest rates this month. Japan’s five-year government bond sale drew higher-than-expected cut-off price, signaling robust demand as speculation eased about the BOJ’s potential exit from its negative interest rate regime.

Japan’s producer prices decelerated in November to the slowest in almost three years, supporting the BOJ’s view that inflationary pressure is moderating.

“The USD/JPY has pared back much of its Dec. 7 dip, as bearish positions unwind on views that previous hawkish expectations may have been overdone,” said Jun Rong Yeap, market analyst at IG Asia Pte. “This comes as BOJ officials continue to seek conviction on their wage-growth condition to be confident of meeting ‘sustainable inflation’ for a policy pivot.”

Elsewhere, oil edged higher as an attack on a tanker in the Red Sea raised fears of disruptions to shipping due to the Israel-Hamas war. Gold ticked higher after falling 1.1% on Monday to trade back below $2,000 an ounce.

Bitcoin rose after posting its steepest drop in almost four months as traders moved to lock in profits following a more than 150% rally this year, triggering large liquidations of bullish bets.

Key events this week:

Germany ZEW survey expectations, Tuesday
US CPI, Tuesday
Eurozone industrial production, Wednesday
US PPI, Wednesday
Federal Reserve policy meeting and news conference with Chair Jerome Powell, Wednesday
European Central Bank policy meeting followed by news conference with ECB President Christine Lagarde, Thursday
Bank of England policy meeting, Thursday
Swiss National Bank policy meeting, Thursday
US initial jobless claims, retail sales, business inventories, Thursday
China 1-yr MLF rate and volume, property prices, retail sales, industrial production, jobless rate, Friday
Eurozone S&P Global Manufacturing PMI, S&P Global Services PMI, Friday
US industrial production, Empire manufacturing, cross-border investment, Friday

Some of the main moves in markets:

Stocks

The Stoxx Europe 600 was little changed as of 8:36 a.m. London time
S&P 500 futures were little changed
Nasdaq 100 futures rose 0.2%
Futures on the Dow Jones Industrial Average were little changed
The MSCI Asia Pacific Index rose 0.5%
The MSCI Emerging Markets Index rose 0.5%

Currencies

The Bloomberg Dollar Spot Index fell 0.2%
The euro rose 0.2% to $1.0791
The Japanese yen rose 0.4% to 145.61 per dollar
The offshore yuan was little changed at 7.1898 per dollar
The British pound was little changed at $1.2562

Cryptocurrencies

Bitcoin rose 1.7% to $41,885.88
Ether rose 0.6% to $2,229.77

Bonds

The yield on 10-year Treasuries declined four basis points to 4.20%
Germany’s 10-year yield declined five basis points to 2.22%
Britain’s 10-year yield declined 10 basis points to 3.97%

Commodities

Brent crude rose 0.3% to $76.27 a barrel
Spot gold rose 0.1% to $1 984.81 an ounce