The Fed’s Thanksgiving tonic

A look at the day ahead in Asian markets from Jamie McGeever.

The Fed gave U.S. markets a perfect pre-Thanksgiving tonic on Wednesday, which should keep risk appetite bubbling along nicely in Asia on Thursday.

Minutes from the Fed’s Nov. 1 to 2 policy meeting showed that a “substantial majority” of policymakers reckon it will “likely soon be appropriate” to slow the pace of rate hikes as the economy adjusts to more expensive credit.

Markets welcomed this with open arms. The Nasdaq rallied 1%, the S&P 500 rose further above the 4000 mark to hit a two and a half month high and the Dow reached its highest level since April.

In a clear sign that investors are firmly in ‘risk on’ mode, the VIX – Wall Street’s ‘fear index’ of implied volatility – fell for a sixth straight day to a three-month low just above the long-run average of 20.0.

Bond markets, on the other hand, offered a more cautious take. Yes, yields fell, but curves went even deeper into inverted territory. Recession next year is a certainty, if you believe the bond market.

U.S. markets are closed for the Thanksgiving holiday on Thursday, and liquidity and activity will be light on Friday. This should allow Asian indicators and events to exert greater influence over local markets this week.

Encouraging signs could come from South Korea. Although the Bank of Korea is widely expected to raise rates 25 basis points on Thursday to a decade-high of 3.25%, the end of the hiking cycle may not be too far away.

Especially in light of the latest smoke signals coming from Fed Towers in Washington.

South Korea’s economy is losing momentum as higher living costs dent household income and demand. Economists at Goldman Sachs say 2023 GDP growth will be only 1.4%, with interest rates peaking at 3.75% early next year before being cut in the fourth quarter.

Japan’s purchasing managers indexes will show how business activity in the world’s third largest economy fared last month. Manufacturing activity is its weakest in almost two years but the services sector is holding up better.

Another market tonic, perhaps?

Three key developments that could provide more direction to markets on Thursday:

  • South Korea producer price inflation (October)
  • South Korea interest rate decision (+25 bps expected)
  • Japan PMIs (November)