Australian and New Zealand bonds fell in response to Friday’s sell-off in U.S. bonds ahead of this week’s U.S. inflation data that will help clarify the Fed’s path forward.
Both countries’ 10-year bond yields rose 3 basis points in early trading Monday, following a modest rise in the U.S. 10-year bond yield on Friday. While major currencies were largely stable, Australian stocks fell as the dollar index widened its decline from Friday.
Wide areas across Asia will be closed on Monday, with markets in China, Hong Kong, Singapore, Taiwan, South Korea, Malaysia and Vietnam closed for the Lunar New Year holiday. Spot trading in US Treasuries will be closed in Asia on Monday due to the Japanese holiday.
U.S. stock futures were little changed after stocks rose on Friday and the S&P 500 index closed above 5,000 index points for the first time.
After hitting a two-month low on Friday, the yen rose slightly to over 149 yen to the dollar on Monday. The Bank of Japan weakened after comments from central bank officials that raising interest rates would take time. The yen has been the worst performer among the G10 currencies this year.
U.S. inflation data released on Tuesday will be crucial for the Fed. According to consensus estimates, year-on-year headline inflation is expected to be 2.9%, the first time it has fallen below 3% since March 2021. Core inflation is expected to decline slightly to 3.7% annually. That’s according to the average forecast of economists surveyed by Bloomberg.
“High inflation is rarely contained without triggering a recession,” Ed Yardeni, president of Yardeni Research, said in a note Monday. “The Fed is lowering inflation toward its 2% goal while allowing the U.S. economy to fly and avoid a hard landing.”
On Friday, the S&P 500 rose 0.6% to a new record, while the Nasdaq 100 rose 1%. Positive signs from tech stocks and fourth-quarter earnings reports also contributed to the rally. Four out of five companies that have reported earnings so far this season have exceeded expectations, giving analysts a brighter outlook for corporate profits.
Traders are boosting expectations for Federal Reserve policy easing after comments from hawkish central bankers and economic data showing there is no immediate need for interest rate cuts. Despite this, US stocks rose.
Swap market pricing shows investors expect a 15% chance of a Fed rate cut in March, down from 65% the previous month. Traders also expect four 25 basis point rate cuts in 2024, down from seven forecasts at the end of last year.
In commodity markets, oil prices fell following Iranian foreign minister’s comments over the weekend that the Gaza war could move closer to a “diplomatic solution.” Crude oil prices fell after rising for five consecutive days.
In Asia, a dataset will be released that includes reports on India’s inflation and industrial production.
