Investor caution prevailed, and broader market sentiment remained subdued as anticipation built for crucial US inflation data, marking a shift from earlier expectations of an imminent Fed rate cut after the start of the new year. In Asia trading, Treasury 10-year yields and the dollar held steady, while the yen faced continued weakness against the dollar due to a notable deceleration in Japanese worker wage growth, seen as limiting the Bank of Japan’s room to exit its ultra-loose policy stance.
With a relatively quiet economic calendar ahead, sentiment is likely to stay reserved, with a keen focus on tomorrow’s release of US inflation data expected to offer crucial cues for market direction. Investors are eagerly awaiting the report, looking for insights into the timing of a potential Federal Reserve rate cut. While headline inflation is anticipated to show a cooling trend in the December data, there’s a growing divergence between aggressive pricing for US interest rate cuts and the resilience of economic fundamentals. This dynamic poses a risk of creating a “reverse Goldilocks” scenario for global markets, with the Fed potentially commencing its easing cycle in June, contrary to market expectations pointing to May or even March.
Amidst the economic landscape, geopolitics remains in the spotlight, with China’s US envoy emphasizing the nation’s unwavering stance against compromise on issues related to Taiwan’s independence.