Risk-On Bias Returns to Asia, but BoJ Hike Looms Large

GLOBAL MOOD: Cautiously Risk-On
Drivers: Central Bank Divergence, US Cooling Inflation

Asia-Pacific markets shifted into a cautious risk-on mood as Wall Street’s tech rebound and softer US inflation supported sentiment. Gains were tempered by expectations of a Bank of Japan rate hike, which could strengthen the yen and ripple through bonds and currencies, keeping investors selective ahead of key policy signals.

TODAY’S WATCHLIST

• BoJ Interest Rate Decision 
  
• RBI MPC Meeting Minutes 

THE BIG STORY
European central banks delivered mixed policy signals this week. The ECB kept rates unchanged for a fourth straight meeting, with President Christine Lagarde stressing a strictly data-dependent approach and ruling out any discussion of rate cuts or hikes for now. Updated projections showed slightly stronger growth in the coming years, but the ECB avoided forward guidance, highlighting persistent uncertainty. In contrast, the Bank of England cut rates by 25 bps to 3.75%, its first cut since August, as inflation cooled and economic conditions weakened. The narrow 5–4 vote split led markets to scale back expectations for further rapid easing despite UK inflation falling to an eight-month low.

Meanwhile, EU leaders struggled to bridge differences over plans to use frozen Russian assets to finance Ukraine’s war effort, a move seen as a critical test of bloc unity. Discussions centred on reassuring Belgium and other countries holding the assets by offering legal and financial guarantees against potential lawsuits from Moscow, though such commitments could face political hurdles at home.

Data Spotlight 
US inflation eased more than expected at the end of 2025, with the headline CPI slowing to 2.7% in December, the lowest since July and well below forecasts of 3.1%. Price pressures cooled despite firm gains in energy, led by fuel oil and natural gas, while food prices rose 2.6% and shelter costs increased 3%. The data remain distorted by the 43-day government shutdown, which prevented the collection of October prices and led the BLS to skip November month-on-month CPI. However, the agency noted that prices rose a modest 0.2% over the two-month period from September to November, pointing to underlying disinflation.

Labour market signals were relatively steady. Initial jobless claims fell by 13,000 to 224,000 in the week ended December 13, slightly below expectations and reversing the prior week’s spike. While claims have been volatile around the Thanksgiving period, the latest reading suggests no sharp deterioration in employment conditions, reinforcing the view of a gradually cooling but resilient labour market.

Takeaway: US Inflation is easing faster than expected, strengthening the case for further Fed rate cuts in 2026. Labour market conditions remain stable, supporting a soft-landing narrative rather than a sharp slowdown.

WHAT HAPPENED OVERNIGHT

• US stocks climb on soft inflation, AI boost
  • US stocks closed higher as a softer-than-expected CPI reinforced expectations of future Fed rate cuts.
  • Technology stocks led to gains, driven by strong AI demand signals
  • Micron surged 10.2% after issuing a blowout profit forecast, nearly double market expectations.
  • Starbucks climbed 4.9%, adding to broader market strength.

• US Treasury yields ease after soft CPI
  • The 10-year US Treasury yield dipped to 4.14%, hovering near two-week lows after a lower-than-expected November CPI print.
  • Headline inflation eased to 2.7% YoY, while core CPI slowed to 2.6%, the lowest since 2021.
  • Inflation data remains noisy due to missing October readings after the government shutdown.
  • Cooling price pressures strengthened the case for further Fed easing in 2026.
  • Markets now price chance of a 25 basis point cut in March and 25 bps of another cut in July.

• US Dollar slips as inflation cools
  • The dollar index fell to 98.3, near recent lows and weakened against the yen and Swiss franc after softer US inflation data.
  • Cooling price pressures reinforced expectations that US inflation is easing.
  • Data came with caveats due to the government shutdown, limiting price collection and monthly comparisons.

• Crude oil prices edge higher on supply risks
  • Brent crude prices rose 0.2% to $59.82 a barrel while WTI crude gained 0.4% to $56.15 per barrel.
  • Markets assessed the risk of additional US. sanctions on Russia.
  • Venezuelan oil tanker blockade kept supply concerns in focus.

Day’s Ledger

Economic Data

• US Fed Balance Sheet
• Japan Inflation Rate
• Eurozone Current Account Data
• India FX Reserves 

Corporate Actions

• Shriram Finance board to consider fund raising
• Orissa Minerals to announce Jul-Sep earnings 

Policy Events

• BoJ Interest Rate Decision 
• BoJ Ueda Speech
• RBI MPC Meeting Minutes 
• ECB Lane Speech
  
  

Tickers to Watch

• CCI to investigate Indigo over recent flight disruptions across routes
• NCLT gives nod for first-stage merger of Adani Harbour and ADANI PORTS
• MAX to invest over ₹10 billion in 450-bed Pune hospital, eyes West India growth
• OLA ELECTRIC promoter Aggarwal sells small stake to clear ₹2.60 billion loan
• MARUTI SUZUKI's WagonR crosses 3.5 million production milestone
• INDIGO top brass to fan out to rebuild systems after operational disruption
• Mitsubishi UFJ Financial Group may invest over $4 billion in SHRIRAM FINANCE

 MUST READ

• Why State Finances are Feeling the Strain: A Case Study of Three States
  Beyond Big Numbers: Making AI Investments Work for India’s Sovereignty
• India’s Industrial Policy Drifts Amid Bold Claims and Faltering Delivery
• Preah Vihear and the Politics of Memory in the Thailand–Cambodia Conflict
• Bank of England cuts key interest rate to 3.75% amid easing inflation
• Securities laws set for reset as FM introduces Bill for unified code
• Power ministry working on plan to boost localisation of critical equipment
• MCA seeks to add 50 NCLT courts and two NCLAT benches: Panel report
• Centre to decide on sugar exports, higher ethanol quota next month and half
• SEBI allows zero-coupon bonds to be issued in smaller denominations
• Trump Media to merge with TAE in $6 billion deal to build nuclear fusion company
• Russian ban on Roblox stirs debate about limits of online censorship
  
  

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See you tomorrow with another edition of The Morning Edge.

Have a great trading day

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