What will move the markets this week?

US stocks appear set to rise, supported by data that suggests the labor market is gradually cooling rather than deteriorating significantly. This stable economic environment encourages optimism for risk assets. While easier monetary policy would be helpful, its implementation still depends on inflation data later this week. Meanwhile, Chinese stocks could be disappointed by the upcoming policy meetings as expectations for bold stimulus are high.

US bonds ⬇ may take a hit as CPI is expected to remain high. This is likely to reduce expectations for rate cuts, which will put upward pressure on short-term yields. Meanwhile, long-term yields remain vulnerable to fiscal profligacy ahead of the new administration’s inauguration.

Chinese stocks ⬇ risk losing momentum if policymakers fail to deliver on stimulus at this week’s Central Economic Work Conference. New measures are expected, but the risk is that a dovish approach could dampen investor sentiment, threatening to wipe out much of the year’s gains. Beyond politics, markets will also be closely watching economic data that should confirm that the worst is behind Asia’s largest economy.

The euro ⬆ is likely to temporarily benefit from the ECB’s more cautious approach. While a December rate cut is certain, especially after signs of easing domestic price pressures, the ECB’s language may be less clear about future action. This has the potential to overturn the aggressive cut expectations currently in place for the coming months. However, any rise in the euro will be limited by continued weak economic data and political instability in France.

The yen ⬆ could hit new highs if the Tankan survey shows further strength in the Japanese economy. BOJ officials are looking for more signs to continue with policy normalization. While wage and price data are critical, they also need evidence that economic growth is developing in line with their forecasts. Expectations for a rate hike have eased significantly in recent weeks, but the data may encourage yen bulls that the RBA will act sooner rather than later.

The Australian dollar ⬆ is likely to gain strength as the RBA is likely to reaffirm its focus on inflation at its final meeting of the year. Although third-quarter GDP growth showed a slowdown, policymakers’ main focus is on price pressures and ensuring they are indeed easing. The central bank can afford to wait thanks to a relatively strong labor market. The monetary policy divergence between Australia and most of its peers is giving the Australian dollar an edge, which could help it recover from a four-month low against the U.S. dollar on Friday.