Key events to watch in the week ahead: 18 – 24 December 2023

This week’s overview

The aftermath of the Federal Reserve (Fed) meeting has given rise to a flood of risk-on sentiments this week, as markets are comforted that rate-cut views have been validated by US policymakers to some extent. The Fed's dot plot showed that policymakers have withdrawn earlier views for additional tightening and are leaning towards three rate cuts in 2024. The dovish pivot may come as a surprise to some, who were expecting the Fed to maintain a tough stance, given easing financial conditions and still above-target inflation.

With that, the Dow Jones Industrial Average (DJIA) managed to find its way to a new all-time high, with much anticipation for the S&P 500 and Nasdaq to follow suit into year-end. On the other hand, the US dollar touches its lowest level since August this year, supporting some recovery in precious metals’ prices. Brent crude prices have regained its footing as well, although more conviction is likely needed for a more sustained reversal.

Heading into the new week, here are four things to note.

19 December 2023 (Tuesday, 8.30am SGT): Reserve Bank of Australia (RBA) meeting minutes

At its meeting in November, the RBA kept its official cash rate on hold at 4.35%, supported by a string of cooler-than-expected data across house prices, retail sales, and inflation. That said, the RBA retained a tightening bias, using the same watered-down wording in the November statement.

"Whether further tightening of monetary policy is required to ensure that inflation returns to target in a reasonable timeframe will depend upon the data and the evolving assessment of risks."

The meeting minutes will be closely scrutinised around what options the Board considered at the meeting, the factors that would prompt the RBA to act on its tightening bias in 2024, and any clues that might suggest the RBA feels its tightening cycle is close to completion.

19 December 2023 (Tuesday, 11am SGT): Bank of Japan (BoJ) interest rate decision

For the upcoming meeting, consensus is for the BoJ to keep its short-term interest rate target unchanged at -0.1% and for the 10-year bond yield around 0%, but maintain a flexible band of 1% as ‘reference’.

Similarly to previous meetings, key focus will revolve around any tweak in policy wordings from the central bank or any adjustment to its yield curve control (YCC) policy, as the BoJ continues to take intermittent steps towards policy normalisation.

Thus far, communications of a policy-pivot timeline from BoJ officials have been muddled, which leaves sentiments highly sensitive to any verbal cues from policymakers. At the upcoming meeting, markets will be on the lookout for policymakers’ views as to whether its wage growth condition for a policy pivot has been met. For now, broad market expectations are priced for Japan to scrap its negative rates only in the second quarter of 2024.

22 December 2023 (Friday, 7.30am SGT): Japan’s inflation rate

Japan’s headline inflation has eased from its peak in January 2023 to 3.3% in October 2023, while the core-core inflation (excluding food and energy prices) has also turned a corner lately, easing to a nine-month low at 4.0% in October.

Ahead, expectations are for November headline inflation to moderate further to 2.7% from previous 3.3%. The core aspect (excluding food prices) is expected to ease to 2.5% from previous 2.9%, while the core-core aspect (excluding food and energy prices) is expected to head lower to 3.8% from previous 4.0%.

Thus far, the BoJ has insisted that the rise in inflation has been driven by cost-push factors, rather than demand-driven, and is therefore not a sign of sustainable price gains. A softer inflation read may provide some validation to that and offer room for the BoJ to exercise patience in its policy settings for further wait-and-see.

22 December 2023 (Friday, 9.30pm SGT): US core Personal Consumption Expenditures (PCE) price index

As widely expected, the Fed kept its Federal Funds target rate unchanged in December at 5.25%-5.50%. Notably, the Fed's all-important median "dot" showed no more rate hikes expected for the first time since March 2021, and three rate cuts are expected in 2024.

The Fed's dovish pivot was preceded by a soft patch of data that supports the soft-landing outlook for the US economy and the idea that inflation is on track to return to the Fed's 2% target.

In contrast to the Fed's projection of three rate cuts in 2024, the interest rate market expects six rate cuts in 2024, with the first one priced for March 2024. The Fed's preferred measure of inflation, the core PCE, has the potential to either validate or move the dial around both the timing and depth of rate cut expectations.

The consensus expectation is for core PCE to increase by 0.2% in November, which would ease the annual rate ease to 3.4% from 3.5%, the lowest rate since April 2021. Headline PCE is expected to rise by 0.1% in November, with the annual rate moderating to 2.8% from 3.0%.