The US dollar and Treasury yields both experienced declines amid growing expectations that the Federal Reserve is moving away from tightening its policy and may consider interest rate cuts in the coming year. For the fifth consecutive day, the US currency weakened against all major Group-of-10 currencies and the majority of emerging-market counterparts in Asia.
The spotlight is now on Chair Powell’s upcoming speech on Friday, with market analysts eager to discern any indications of a clear shift towards easing, as noted by Daragh Maher, head of FX strategy for the US at HSBC. A shift in tone could pose a challenge to the bullish US dollar view.
In November, the Bloomberg Global Aggregate bond index posted a 4.9% gain, on track for its best month since December 2008. This rally follows recent data indicating a slowdown in inflation and weaker economic activity. Dovish comments from Fed officials and billionaire investor Bill Ackman’s anticipation of earlier-than-expected rate cuts also contributed to the positive momentum.
The MSCI All Country World Index of stocks has seen an 8.8% increase so far this month, marking its most significant gain since November 2020.
Fed swaps are now anticipating over 100 basis points of rate cuts by the end of 2024. This follows Governor Christopher Waller’s statement that the bank is well-positioned to push inflation to a 2% target.
Two-year Treasury yields dropped an additional five basis points to 4.69%, continuing the decline observed on Tuesday, while a Bloomberg gauge of the dollar is on course for its worst month in a year. Fears of a recession and dovish Fed commentary have led investors to speculate that the central bank will need to reverse its most aggressive tightening cycle since the 1980s.
Stocks in Asia displayed mixed performances. Hong Kong shares fell over 2%, heading for their lowest close in a year, influenced by losses in some tech firms following a growth warning by food-delivery giant Meituan. Conversely, Australia remained a bright spot after cooling inflation strengthened the case for the local central bank to pause interest rates next week.
US equity futures edged higher, while European counterparts remained flat.
The New Zealand dollar rallied approximately 1% against the greenback after the Reserve Bank of New Zealand’s new policy rate forecasts suggested a slightly higher track in 2024, implying a chance of an increase with no reduction until mid-2025. The central bank kept interest rates unchanged for a fourth straight meeting on Wednesday.
Emerging Asian currencies also experienced gains, with the Thai baht and Taiwanese dollar leading the way. The Japanese yen rose to its strongest level in more than two months, partly due to month-end corporate demand.
Market analyst Tony Sycamore noted, “The latest round of dovish Fed comments, which open the door to rate cuts in 2024, follows cautious comments from Fed officials in early October, which we noted as the start of the pivot.”
Governor Waller, known as one of the most-hawkish officials, expressed confidence in the current policy’s ability to slow the economy and bring inflation back to 2%. Meanwhile, his colleague Michelle Bowman refrained from signaling an imminent rate hike.
In other markets, oil held its biggest gain in a week as traders awaited a high-stakes OPEC+ meeting on supply. Gold extended gains to its highest level since May, buoyed by hopes of a Fed policy shift.
On the economic front, US consumer confidence rose for the first time in four months in November, supported by more optimistic views about the labor market outlook. Home prices reached a fresh record high, according to seasonally adjusted data from S&P CoreLogic Case-Shiller.
In the corporate realm, Meituan shares experienced the most significant drop in over a year after the company warned of a slowdown in growth in its main meal delivery business for the current quarter, coupled with increased spending on promotions. PDD Holdings surged 18% after reporting a stronger-than-anticipated doubling in revenue, attributed to its shopping app Temu’s increased discounts and marketing efforts to attract consumers from Shein and Amazon.com.
Meanwhile, Jack Ma urged Alibaba Group Holding’s staff to draw inspiration from hard-charging rival PDD in a surprise internal memo, calling for fundamental change at the company he co-founded decades ago. Alibaba’s stock was down 2.6% in Hong Kong.
