Shenzhen Stocks Surge in Asia-Pacific as U.S. Inflation Outlook Eases

Investor sentiment in the Asia-Pacific region was lifted by expectations of cooled inflation in the United States. Most markets in the region rose as a result.

In China, the Shenzhen Component rose 1.58% to close at 11,785.77, leading gains in the wider region. The Shanghai Composite rose 1.01% to 3,227.59 as the nation saw home prices further drop in December. Hong Kong's Hang Seng index was flat after erasing earlier gains.

In Australia, the S&P/ASX 200 rose 0.82% to 7,388.2 while Japan’s Nikkei 225 fell 1.14% to 25,822.32 and the Topix shed 0.88% to 1,886.31. South Korea’s Kospi inched up 0.58% to 2,399.86 and the Kodaq gained 0.71% to 716.89.

Over the weekend, China reported a surge of nearly 60,000 Covid deaths since dropping restrictions last month. The announcement came after the World Health Organization criticized China, alleging that it was underreporting deaths.

China's home prices fell 1.5% in December on an annualized basis, according to Refinitiv calculations of data from the National Bureau of Statistics.

House prices in December decreased at a rate of 0.25% on a monthly basis, which is the same rate of decline that was seen in November. Existing home prices saw a year-over-year drop of 0.48% in December, which is slightly faster than the 0.44% decline that was seen in November.

The People's Bank of China has hinted at changes to its "three red lines" for developers. Introduced in 2020, the measures were designed to reduce developers' debt levels and curb financial risks in the real estate market. This is part of a broader effort to limit speculation in home prices.

Bitcoin has continued its streak of gains for the past thirteen days, passing the $20,000 mark for the first time in over two months. This is a key psychological level for the cryptocurrency, and it is likely to continue to rise in value in the coming days and weeks.

Bitcoin prices rose 2.59% over the past 24 hours, according to CoinMetrics, last standing at $21,271.41.

According to official data, Japan’s producer prices rose 10.2% in December compared with a year ago. This is a significant increase from the previous year, and indicates that inflation is starting to pick up in the country.

The monthly reading showed a rise of 11.1%, which was higher than the 9.5% rise expected by economists. This marked the third consecutive monthly rise.

Producer prices in the US rose by 0.5% in November, higher than the expected 0.3% increase. This is a positive sign for the economy, as it indicates that inflationary pressures are starting to build.

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A number of economic data releases are scheduled for the week of January 16, including China's industrial output and gross domestic product figures, as well as the Bank of Japan's interest rate decision.

On Monday, South Korea will publish revised trade data and Indonesia will release its trade balance for December. India is also scheduled to release its wholesale price index for the month of December, which economists polled by Reuters are expecting to ease to 5.6%.

On Tuesday, China will release retail sales, industrial output, urban fixed asset investment, and gross domestic product (GDP) figures for December. Singapore will also publish its non-oil exports for December on the same day. These economic indicators will give insight into the health of both countries' economies and how they are performing compared to the previous month and quarter.

On Wednesday, the Bank of Japan will conclude its monetary policy meeting and is expected to maintain its ultra-low interest rates. Investors will be looking for clues as to who may be Governor Haruhiko Kuroda's successor and any potential policy changes that may be ahead.

Japan is scheduled to publish machinery orders for November on the same day that Malaysia releases December trade data.

On Thursday, Malaysia's central bank will announce its monetary policy rate while Australia releases its employment figures. This could have an impact on the markets and the economy.

China will release its one-year and five-year loan prime rates on Friday. Japan is also scheduled to release its consumer price index for December.

As inflation expectations decline among consumers, there is a growing expectation that the Federal Reserve will soon reduce the level of interest rate increases, and eventually end them altogether. This is likely to have a positive impact on the economy, as it will encourage more spending and investment.

The University of Michigan consumer sentiment survey on Friday showed the one-year inflation outlook down to 4%. This is the third straight monthly decrease and the lowest level since April 2021.

Traders are assigning a 94.2% chance of a 0.25 percentage point interest rate increase on Feb. 1, when the Fed’s next two-day meeting concludes. This would be another smaller move than the 0.5 percentage point hike in December, which itself was a deceleration from four straight 0.75 percentage point increases.

LPL Financial chief economist Jeffrey Roach said that inflation expectations are well-anchored and improving, as pricing pressures are weakening across many sectors. He added that the Fed will likely hike by 0.25% at the upcoming meeting later this month, and that it wouldn't be surprising if the Fed starts talking about pausing in the near future.

The University of Michigan's consumer sentiment index rose for a second month in a row in January, although it remains at a historically low level. The index climbed to 64.6 from 59.7 in December. Still, it remains about 4% below its level from the prior year.

"There is still a lot of uncertainty around inflation expectations, and global factors could cause the recent improvements to reverse," said Joanne Hsu, Surveys of Consumers director.

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A negative inflation reading on Thursday, combined with warnings of a mild recession from major banks on Friday, could be signs that the Fed will pause soon or even cut rates this year. However, that would require another change in direction from the central bank.

"Even if you don't agree with the Federal Reserve's policy, you can still believe in them," said Lauren Goodwin, economist and portfolio strategist at New York Life Investments.

Goodwin stated that the large majority of Fed voting members were projecting a Fed funds rate 5% or higher this year in the last meeting. And given the concern some central bankers have expressed about the consequences of pausing too soon, they may be determined to hit that mark.

"The Bank of Canada has said that it plans to raise interest rates by 25 basis points, and unless we see a slowdown in inflation or a sharp decline in economic growth, it is unlikely to change its mind," said Goodwin.

Trent Masters, a fund manager, says that businesses that relied on "free and infinite capital" are now facing a harsh reality and could even go bankrupt. He said that he is concerned about two stocks going into 2023.