Markets upbeat on stronger rate hike prospects

US equities rallied in the overnight session after the FOMC minutes for the October meeting showed that most Fed officials think that conditions may become appropriate for a December rate move. 

US Federal Reserve
Source: Bloomberg

Market participants probably felt relief that the uncertainty concerning the timing of the ‘will-they-or-won’t-they’ rate hike may be coming to an end soon. In fact, the discussion has shifted to how quickly the Fed will raise interest rates subsequently after the lift-off. This uncertainty is behind one of the reasons for the market volatility this year.

But judging from the Federal funds futures market, it would seem that there are investors who are not persuaded that the Fed will hike rates by the year end. According to Bloomberg, the probability of a Fed rate increase at the 15-16 December meeting remains unchanged at 66%. Investors may be waiting for the November non-farm payrolls report to assess if the strong October report was a ‘fluke’. Another strong reading will build confidence for the Fed to act.

After all, the Fed officials judged it ‘appropriate to wait for additional information providing evidence of further improvement in the labour market and increasing their confidence that inflation was on a path to return to 2% over the medium term before raising the target range for the federal funds rate.’

More importantly, the committee has changed its assessment to include expected progress towards its objectives, instead of just on realised progress. This paved the way for conditions to be appropriate ‘to initiate the normalisation process at the next meeting’. This change is what sets off the market rally we saw in the US session, which was extended to Asia today.

 

Japan

The BOJ continues to maintain a cautious stance, leaving the monetary policy unchanged. Despite the weakness in Japan’s economy, recent JPY depreciation, the rise in the stock market, and prospects of fiscal stimulus may have reduced the pressure to ease further, for the time being.

The next BOJ meeting will be held just after the Fed’s FOMC, on 17-18 December. Therefore, the possibility of additional easing may be contingent on several factors. Firstly, the US outlook for both monetary policy and the economy. Secondly, Japan’s economic data, particularly related to capex, as private investment has been somewhat disappointing. Thirdly, the outlook for wage increase in the spring labour negotiations.

Indeed, BOJ governor Kuroda highlighted in his post-decision press conference that he would be watching the wage talks with interest, observing that prices will not rise if wages do not increase.

The Nikkei 225 rose 1.1%, adding 210.63 points to close at 19,859.81, with investors eyeing the key 20,000 level. The index had rallied 17.5% in six weeks since reaching the eight-month lows of 16901.49 on 29 September 2015.

 

Singapore

For the STI, it seems like the 2900 is a battleground for market participants. Over the past few sessions, we have seen the index swung below and above the level. Traders pushed the STI back above 2900 today, in tandem with the regional upbeat mood as the release of the FOMC minutes brought relief to the risk markets.

Financials, industrials, and telecommunications led gains, climbing over 1% as of 4.53pm. The three Singaporean banks were bid higher, as clearer prospects of higher interest rates are favourable for the outlook on net interest income. However, the STI needs to move higher to break out of the recent bearish trend, with the 50-day moving average at 2941 acting as a minor resistance.

 

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