Stock markets across Asia opened the week on a cautious note, with key indices struggling for direction as global investors brace for an anticipated interest rate cut from the United States Federal Reserve. The focus has shifted from whether the Fed will act this week to the broader question of how much further it can go in the new year to support the economy.
Markets Await "Hawkish Cut" Amid Inflation Concerns
The expected reduction in US borrowing costs has been widely anticipated by traders for weeks. This follows a series of signals from key Fed officials and recent data pointing to a softening labour market. However, the latest inflation readings have introduced significant uncertainty about the central bank's future path.
The delayed report on the Personal Consumption Expenditure (PCE) price index for September, the Fed's preferred inflation gauge, showed a slight increase from August's level. While the core reading remained unchanged, the data confirmed that price pressures remain stubbornly above the central bank's 2% target. This persistent inflation, coupled with signs of weakening consumer confidence, has raised worries that the Fed's room for further rate cuts in 2026 may be limited.
Analysts Scrutinise Fed Statement for Policy Clues
Economists at Bank of America highlighted that the Fed's pre-meeting communication blackout ends on Thursday, after its decision. Markets will be keenly listening for any dissenting views among policymakers. The analysts also noted that a backlog of economic data delayed by a prior government shutdown will now flow through, providing critical information before the Fed's next meeting in January.
This data includes three non-farm payroll reports, two unemployment updates, two inflation releases, and retail sales figures for October, November, and potentially December. According to Bank of America, the Fed's policy statement is likely to see key changes, including an adjustment to language describing labour market conditions to reflect a recent uptick in unemployment.
"The forward guidance language might also be tweaked to indicate that the bar for additional cuts has risen. This would be a nod to the hawks," the bank's economists wrote. Markets are currently pricing in what analysts call a "hawkish cut," expecting fewer than 25 basis points of cuts across the first three meetings of 2026.
Regional Markets Mixed, Geopolitical Tensions Simmer
While Wall Street's three main indexes closed last week positively, Asian markets failed to follow suit uniformly. Tokyo's Nikkei 225 was flat, while Hong Kong, Sydney, and Singapore traded in negative territory. In contrast, markets in Shanghai, Seoul, Wellington, and Taipei managed to post gains.
Traders are also monitoring rising geopolitical tensions between China and Japan. Tokyo summoned Beijing's ambassador after alleging that Chinese military aircraft from the Liaoning aircraft carrier locked radar onto Japanese jets near Okinawa over the weekend. China's navy denied the claims, calling them "completely inconsistent with the facts" and urging Japan to stop "slandering and smearing." The diplomatic friction follows recent comments from Japan's Prime Minister regarding a potential military response to any Chinese action against Taiwan.
Key market figures as of 0230 GMT showed the Hang Seng Index down 0.6%, the Shanghai Composite up 0.6%, and the dollar weakening against the yen to 154.96. Oil prices held steady, with Brent crude at $63.74 per barrel.
