Asian shares dip, dollar firms ahead of central bank rate hikes


Asian shares dipped on Monday while the dollar drifted higher at the start of a hectic week, as markets awaited a flurry of rate decisions from the U.S. Federal Reserve, the European Central Bank and others.

The U.S. consumer inflation report on Tuesday will set the tone for markets for the week. Economists expect core inflation to ease to 6.1% in November from a year ago, compared with a rise of 6.3% the previous month.

However, risk could be on the upside, after data on Friday showed producer prices increased at a faster-than-expected pace, fuelling concerns the CPI report may indicate inflation is sticky and interest rates may have to stay higher for longer.

Wall Street dropped, Treasury yields advanced and while the dollar pared earlier losses.

In Asia, MSCI’s broadest index of Asia-Pacific shares outside Japan eased 0.1% on Monday, after tumbling 2.6% last week – the biggest fall since late September.

Japan’s Nikkei dipped 0.5%, while South Korea dropped 0.7%. S&P 500 futures slipped 0.2%, while Nasdaq futures fell 0.3%, as caution mostly reigned.

“This week, markets could go anywhere… A hotter CPI say 6.4% (and above) and a hawkish set of dots from the Fed and statement from Powell could see funds call it a day for 2022 risk bleeds into 2023 and funds buy back USD shorts,” said Chris Weston, head of research at Pepperstone.

“It would be a big surprise if we didn’t see the Fed step down to a 50bp hike… We also want to understand if Jay Powell opens the door to a slowdown to a 25bp hiking pace from February – again, while in line with market pricing, this could be taken that we’re closer to the end of the hiking cycle and is a modest USD negative.”

Fed policymakers are widely expected to raise rates by 50 basis points on Wednesday at their last meeting of the year, to a range of 4.25% to 4.50%, which would mark a slower pace of rate increases.

Futures also show the terminal rate peaking at 4.961% next May, and then declining to 4.488% by December 2023, as markets priced in some cuts from the Fed as the U.S. economy slows.

In addition to the Fed, the European Central Bank and the Bank of England are also set to announce interest rate hikes, as policymakers continue to put the brakes on growth to curb inflation.

In the currency markets, the U.S. dollar drifted 0.1% higher against a basket of currencies to 105.01, although it is not too far away from the five-month trough of 104.1 a week ago.

Sterling fell 0.2% to $ 1.2242, while the Aussie slipped 0.19% to $ 0.6783.

Treasury yields held largely steady on Monday after rallying from the lowest levels in three months during the previous session.

The yield on benchmark 10-year Treasury notes held at 3.5875%, compared with its U.S. close of 3.5670%. The two-year yield touched 4.3610%, up slightly from its U.S. close of 4.330%.

The yield curve remains inverted at around -77bps, pointing towards a possible U.S. recession in the near future.

In the oil market, prices rose by more than 1% after falling to the lowest level this year on global recession fears.

U.S. West Texas Intermediate (WTI) crude futures surged 1.4% to $ 72.03 per barrel, while Brent crude settled at $ 77.15 a barrel, also 1.4% higher.

Spot gold was slightly lower, trading at $ 1,796.04 per ounce.