Asian shares slump, dollar firms ahead of central bank rate hikes

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By Stella Qiu

SYDNEY (Reuters) - Asian shares slumped and the dollar firmed on Monday at the start of a hectic week, as markets awaited a flurry of interest rate decisions from the U.S. Federal Reserve, the European Central Bank and others.

The caution is expected to spill over onto European markets, with the pan-region Euro Stoxx 50 futures down 0.5%, German DAX futures losing 0.5%, and FTSE futures 0.2% lower.

Both the S&P 500 futures and Nasdaq futures dipped 0.1%.

In Asia, MSCI's broadest index of Asia-Pacific shares outside Japan slumped 1.2%, erasing almost all of the previous week's gains stemming from optimism that China is finally opening up its economy with the dismantling of its zero-COVID policy.

Japan's Nikkei eased 0.2%.

Chinese bluechips dropped 0.9%, while Hong Kong's Hang Seng index was down 2.2%, as investors' focus shifted away from crippling COVID-19 curbs to the surge in infections that is now disrupting the economy.

On Friday, Wall Street dropped, Treasury yields advanced and the dollar pared earlier losses.

A U.S. consumer price index (CPI) report on Tuesday will set the tone for markets for the week. Economists expect core annual inflation to ease to 6.1% in November, compared with a rise of 6.3% seen in the previous month.

Risk could be on the upside, after data on Friday showed producer prices had increased faster than expected, fuelling concerns the CPI report may indicate inflation is sticky and interest rates may have to stay higher for longer.

"A hotter CPI – say 6.4% (and above) and a hawkish set of dots from the Fed and statement from Powell could see funds call it a day for 2022 – risk bleeds into 2023 and funds buy back USD shorts," said Chris Weston, head of research at Pepperstone.

"It would be a big surprise if we didn't see the Fed step down to a 50bp hike .... We also want to understand if Jay Powell opens the door to a slowdown to a 25bp hiking pace from February - again, while in line with market pricing, this could be taken that we're closer to the end of the hiking cycle and is a modest USD negative."

The Federal Reserve is widely expected to raise rates by 50 basis points on Wednesday at its last meeting of 2022, though focus will also be on the central bank's updated economic projections and Fed Chair Jerome Powell's press conference.

Kevin Cummins (NYSE:CMI), chief U.S. economist at NatWest, said any surprise in the CPI report was unlikely to shift the Fed from a 50-basis-point rate hike, although it would play a bigger role in the policy statement and the tone of Powell's press conference.

"As is often the case, the updated dot plot and terminal (peak) rate estimates will be even more critical to the policy outlook than the near-term action this week - a theme Chair Powell will focus on in his prepared remarks and press conference," Cummins said.

In addition to the Fed, the ECB and the Bank of England are also set to announce interest rate hikes on Thursday with both likely to hike by 50 basis points, as policymakers continue to put the brakes on growth to curb inflation.

In currency markets, the U.S. dollar drifted 0.1% higher against a basket of currencies to 105.17, although it was not too far away from the five-month trough of 104.1 a week ago.

Sterling fell 0.3% to $1.223, while the Australian dollar also slipped 0.3% to $0.6759.

Treasury yields held largely steady on Monday. The yield on benchmark 10-year Treasury notes held at 3.5600%, compared with its U.S. close of 3.5670%. The two-year yield touched 4.338%, up slightly from its U.S. close of 4.330%.

In the oil market, prices rose on uncertainty over the restart of a key pipeline supplying the United States and the threat from Russia to cut production in retaliation for a Western price cap on its exports..

Brent crude futures were up 0.6% to $76.58 a barrel while U.S. West Texas Intermediate crude was at $71.62 a barrel, up 0.8%.

Spot gold was 0.6% lower at $1,785.78 per ounce.