Global Markets Navigate Dovish Shift in Central Bank Policies and Earnings Optimism
European markets opened the week on a slightly higher note, continuing the positive momentum carried over from the previous week. Last week, regional markets closed cautiously higher, wrapping up a week-long rally fueled by strong earnings reports and a perceived dovish stance from central banks.
Investors have adjusted their forecasts for Fed rate cuts in the coming year, with full pricing in of a reduction by June, according to swaps pricing. This increase in dovish expectations was partly driven by a weaker-than-expected US payrolls report and a modest uptick in unemployment reported on Friday.
There is growing confidence in the belief that inflation will continue to slow down, leading central banks to consider easing policies to prevent them from becoming more restrictive in real terms. Fed fund futures suggest an 85% likelihood that the Federal Reserve has completed its tightening cycle and an 80% chance of rate cuts beginning in June.
Meanwhile, futures indicate an 80% probability that the European Central Bank (ECB) will start easing as early as April, and the first-rate cut by the Bank of England (BoE) is nearly fully priced for August.
On the contrary, the Bank of Japan (BoJ) is proceeding with easing measures at a gradual pace. BOJ Chief Ueda hinted at getting closer to their inflation target, but it remains premature to entirely abandon their super-easy monetary policy.
An outlier in this scenario is the Reserve Bank of Australia (RBA), which could raise interest rates again on Tuesday after maintaining a stable policy for four months. Analysts are leaning strongly towards a rate hike to 4.35%, although market sentiment suggests it could still be a coin toss, setting the stage for potential market volatility.
In the United States, equity futures were flat after the major indices recorded their best week of the year. In the Asia-Pacific region, markets took comfort in a soft US jobs report from the previous week, which reduced expectations of interest rate hikes. South Korea's stocks surged on Monday following the reinstatement of a short-selling ban.
It's worth noting that at least nine Federal Reserve speakers will appear this week, including two from Chairman Jerome Powell, with the second scheduled for a Q&A session. There are also several ECB speakers on the agenda, including President Christine Lagarde, who will speak on Friday.