Bank of Japan disappointed investors with no plans for 2024. Oil rises due to Houthi attacks on tankers in the Red Sea

Goldman Sachs yesterday raised its target for the S&P 500 by the end of next year to 5,100 from a mid-November forecast of 4,700, saying the Fed’s dovish policy rate last week and lower consumer prices will allow real yields to fall and support equity valuations. Markets estimate the odds of a 25 bps rate cut at 8% at the next FOMC meeting on January 30-31 and 76% at the next meeting on March 19-20.

Fed President Cleveland Mester issued a dovish statement yesterday, indicating that financial markets are “slightly ahead” of policy normalization, targeting an interest rate cut early next year.

Canada will release its inflation report today. Core inflation is expected to fall from 3.1% to 2.9% year-over-year. The overall inflation rate will also fall from 4.2% to 4.0% y/y. But it should be noted that the Bank of Canada (BoC) is more focused on median indicators. The median CPI is now at 3.6% y/y and is forecast to fall to 3.3% y/y. At its last meeting, the Bank of Canada left the key rate unchanged at 5.0% and kept the possibility of further tightening open, stating that it remains concerned about high inflation, although it recognized the easing of price pressures and slowing economic growth. Thus, a further slowdown in inflation would increase the probability of a rate cut as early as 2024 (currently, the probability of a 25 bps rate cut in January 2024 is around 27%) and therefore negatively impact the Canadian currency.

A spokesperson for the ECB Governing Council yesterday, Kazimir, said the following: “The policy mistake of premature easing would be more significant than the risk of staying tight for too long.” His colleague, Vasle, added: “Market expectations for interest rate cuts are premature in my view, both with regard to the start of cuts and the totality of the moves.” Thus, the ECB is trying to maintain a more hawkish tone than the US Fed, which could be positive for the euro but negative for European indices.

Crude oil and gasoline prices rose to two-week highs on Monday and closed with moderate gains. The main bullish factor for crude on Monday was geopolitical risks after BP joined Equinor and Euronav in suspending crude shipments to tankers across the Red Sea due to increased attacks on ships in the region. Attacks on oil tankers in the Middle East are forcing shippers to divert cargoes around the southern tip of Africa instead of going through the Red Sea, disrupting crude supplies. At least fourteen merchant ships have been attacked or approached in Yemen by Iran-backed Houthi militants in the Red Sea since Israel’s war with Hamas began in October.

Asian markets were mostly down on Monday. Japan’s Nikkei 225 (JP225) lost 0.64% yesterday, China’s FTSE China A50 (CHA50) added 0.11%, Hong Kong’s Hang Seng (HK50) was down by 0.97%, and Australia’s ASX 200 (AU200) was down by 0.22%.

The Nikkei 225 Index (JP225) rose by 1.2% after the Bank of Japan’s meeting on Tuesday. The Bank of Japan (BoJ) kept its ultra-soft monetary policy unchanged and maintained its forward guidance as part of its expected decision. The decision matched market expectations, but some investors were waiting for signs that the dovish Central Bank might signal a possible move away from negative interest rates. However, the BoJ did not provide information on its plans to tighten monetary policy in 2024. Market attention will now shift to Governor Kazuo Ueda’s press conference later in the day.

The minutes of the December meeting of the Reserve Bank of Australia (RBA) showed that while the Bank considered another interest rate hike, it decided against the move pending new data on the economy.