Equities across the Far East have tumbled overnight in response to growing unrest over Covid restrictions in China. Concerns that rising case numbers and ongoing protests could lead to further supply chain disruption and dampen consumption are weighing on sentiment with oil prices also moving lower overnight along with a number of base metals. Meanwhile, Australian retail sales fell 0.2% in October against market expectations for a 0.5% monthly rise.
Over the past week, hopes of an early easing in the pace of monetary policy tightening have continued to build. That has helped fuel a further slide in bond yields with US 10-year Treasury yields dropping close to their lowest levels since early October, while UK 10-year gilt yields have touched below 3.0% for the first time since early September. However, central banks continue to face the dilemma of balancing growth and inflation risks and so are conscious of the risks of tightening too much or too little.
As a result, the emphasis now seems to be on a more measured pace of tightening. Last week’s release of the minutes to the November Federal Reserve monetary policy meeting and comments from Fed officials again indicated that after four successive 75 basis points rate hikes, a smaller rise of 50bp is likely at the next Fed meeting in mid-December.
Comments from Bank of England and European Central Bank policymakers have generally been a little more guarded. In particular, ECB officials seem to be indicating that the December policy decision will be a close call. But on balance both seem to be signalling that their next moves are likely to see smaller rate rises than the 75bp moves approved last time. Later today, ECB President Lagarde is due to speak in front of the European Parliament’s Economic and Monetary Affairs committee and markets will be watching closely for clues over the outlook for monetary policy. However, with her appearance coming just ahead of the next Eurozone CPI report on Wednesday, her comments may be somewhat guarded.
Elsewhere, there is a lack of any tier 1 economic data releases today. Eurozone M3 money supply data is forecast to show a moderation in annual growth from 6.3% to 6.1% in October. In the UK, the CBI survey will provide one of the first indications of spending trends heading into the key Christmas period, ahead of the more closely watched ONS report on 16 December, albeit the survey will not capture the full effect of Black Friday sales.
In the US, today’s focus will be on comments from Fed members Williams and Bullard. However, markets are likely to pay more attention to Fed Chair Powell’s comments on Wednesday.
Events in China have led to a deterioration in market risk sentiment, pushing the US dollar and US Treasury bonds higher. GBP/USD has moved lower as a result but continues to hold above the 1.20 mark, while EUR/USD is currently trading just below 1.04. The Brent crude oil prices has also seen a further decline to around the recent low in late-September.
