Asian markets experienced a slight downturn on Wednesday, as investors anxiously awaited the release of key US inflation data.
This crucial economic indicator will heavily influence the Federal Reserve’s interest rate decision next week, leaving markets in a state of cautious anticipation.
The dollar remained relatively stable following a three-day surge.
Asia’s mixed response: Hong Kong, China lead the decline
Several Asian markets registered declines. Hong Kong and mainland China saw stock prices fall as Beijing commenced its annual economic meeting on Wednesday.
Taiwan and Australia also experienced downward pressure.
South Korea, however, bucked the trend, marking its second consecutive day of gains following the recent political upheaval caused by a short-lived declaration of martial law.
Inflation concerns and central bank actions
A Bloomberg index tracking the dollar’s strength showed little change in the lead-up to the release of the American Consumer Price Index (CPI).
S&P 500 futures exhibited minimal movement, while European markets showed slight declines.
The upcoming CPI data will provide the Federal Reserve with further insights into inflation before their next meeting.
Swap trading currently indicates an 85% probability of a quarter-point rate reduction this month.
Simultaneously, China’s two-day Central Economic Work Conference is expected to outline policy directions for the coming year.
Traders remain encouraged by recent stimulus signals from top Chinese leadership.
Kimmy Tong, global market & FX strategist at Everbright Securities International, highlighted the market’s focus: “The market is seeking evidence to support continued rate cuts” in the US.
“Given that US CPI data has gradually rebounded since October, the importance of the November CPI data is crucial for justifying two rate cuts in the first half of 2025, ” Tong told Bloomberg.
China’s economic blueprint: ambitious deficit and rate cuts
Economists predict that China may significantly increase its budget deficit—potentially to its highest level in three decades—and implement the most substantial interest rate cuts since 2015.
At least seven Chinese brokerages foresee a fiscal deficit target reaching 4% of GDP for next year, the widest since a major tax reform in 1994.
Historically, Beijing has maintained its budget deficit ratio at or below 3%.
Shifting sands in China: investor skepticism and market reversal
Chinese and Hong Kong shares initially showed positive momentum in the Asian morning, but this trend reversed course later.
Kyle Rodda, a senior market analyst at Capital.com, offered an explanation to Bloomberg: With little follow-through from China’s politburo announcements, “it may be a case of once bitten, twice shy for investors, who are becoming more skeptical and less willing to buy into stimulus, given the lack of follow through with past policy promises.”
Japan’s yen: inflationary pressures and rate hike expectations
In Japan, the yen strengthened slightly after corporate goods prices surged to their fastest pace in 16 months, indicating escalating inflationary pressure within the economy.
This development lends support to the central bank’s continued policy normalization.
Despite this, the yen’s overall strength remains muted as traders scaled back their expectations for a December rate hike.
Overnight indexed swaps now reflect approximately a 20% chance of a December rate increase, significantly down from 60% at the start of last week.
Motonari Sakai, Tokyo-based chief manager of the foreign-exchange and financial products trading division at Mitsubishi UFJ Trust & Banking Corp., noted: “The yen has shown a small reaction to the producer-price data,” adding, “But the move is contained ahead of the US inflation data.”
Geopolitical undercurrents
On the geopolitical front, Nippon Steel Corp.’s bid to acquire United States Steel Corp. appears to be nearing its conclusion.
Sources familiar with the matter indicate that President Joe Biden is poised to formally block the $14.1 billion sale on national security grounds once the deal is officially referred to him later this month.
Meanwhile, China’s President Xi Jinping has initiated an investigation into Nvidia Corp. and banned the export of several rare earth materials with military applications, potentially escalating trade tensions with the US.
Beijing has also imposed restrictions on the sale of key drone components to the US and Europe.
Oil prices edged upward, anticipating the crucial US inflation data and a forthcoming OPEC monthly report.
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