Another central bank pivots. The Bank of Korea on Thursday slowed its pace of tightening to a modest 25 basis point hike, becoming the latest central bank to step down from outsized rate increases.
This has aided the risk-on mood in the market, with Asian shares mostly advancing and U.S. dollar broadly weaker.
Overnight, markets rejoiced at the prospect of the U.S. Federal Reserve downshifting to a smaller 50 basis point hike at its next policy meeting in December, ignoring warnings that rates might still have to peak above 5% by mid next year.
The minutes of the Fed's November policy meeting showed a "substantial majority" of policymakers reckon it will "likely soon be appropriate" to slow the pace of rate hikes.
Long-term Treasuries jumped. Yields on 10-year notes dropped to be a huge 79 basis points below two-year yields, a curve inversion on a scale not seen since the dotcom bust of 2000 and, on the face of it, a signal investors expect a deep economic downturn in coming months.
However, much U.S. economic data remains healthy, regardless of what the bond market says. The Atlanta Fed's GDPNow showed the economy expanding at an annualised rate of 4.3% so far in the fourth quarter, implying growth is speeding up, not slowing down.
Elsewhere, China's new economic stimulus – a likely cut to the banks' reserve requirement ratio and a rescue package for the battered property sector – helped real estate stocks but failed to lift the wider mainland market, which fell 0.3% as surging COVID cases still dominated investor sentiment.
China's COVID infections hit a record high, with Beijing, which has the strictest rules, failing to contain the spreading virus. In fact, the author's old community building in Beijing has been sealed off for at least three days, its first such shutdown.
Ting Lu, chief China economist at Nomura, says a RRR cut is likely to be of little use, as the biggest roadblock lies in the government's zealous approach to dealing with COVID, rather than insufficient loanable funds.
"In our view, ending zero COVID as soon as possible is the key to raising credit demand and bolstering growth."
Key developments that could influence markets on Thursday:
Germany Ifo Business Climate index
Riksbank likely to raise rates by 75 basis points, with risk of 100 bp
Speakers: ECB officials including vice president Luis de Guindos, Board member Andrea Enria, Executive Board Isabel Schnabel, and Bank of England's Dave Ramsden and Huw Pill