Geopolitical risks fuel the rally of gold and oil. Traders are waiting for the Bank of Japan meeting

Stocks also declined yesterday due to tensions in the Middle East following a report that Israel conducted a limited tank invasion of the Gaza Strip before withdrawing troops. Markets expect an all-out ground attack by Israel, which could lead to an expansion of the war to include Hezbollah.

Friday’s report on the US PCE deflator, the Fed’s preferred inflation gauge, largely matched market expectations and had little impact on Fed policy expectations. The PCE core deflator report for September came in at plus 0.3% m/m and 3.7% y/y, which was in line with market expectations. The final US consumer sentiment index for October from the University of Michigan was revised upward by 0.8 points to 63.8, which was stronger than expected but still a 5-month low.

On Thursday night, the US launched airstrikes on two Iranian-backed targets in Syria. The strikes were in response to attacks on US personnel in Iraq and Syria since October 17. In addition, an Israeli defense official said Friday that Israeli forces are expanding ground activity. Israel carried out ground raids into the Gaza Strip overnight Wednesday through Thursday before withdrawing troops. Markets expect an all-out Israeli ground invasion that could lead to expanded military action, including Hezbollah in Lebanon and possibly other Iranian-backed groups.

This week, the Eurozone will release inflation data for October as well as the GDP report for the quarter. Inflation will be key as rising inflation may force the ECB to rethink its stance or at least adopt a more hawkish rhetoric ahead of the December meeting. Inflation is expected to fall, with analysts predicting both the monthly rate and the annual rate to fall.

Crude oil prices rose on Friday amid tensions in the Middle East after Israel expanded its ground operation in Gaza. Oil prices also found support after Exxon’s CEO said his company sees limited global oil supply over the next few years due to a lack of investment in fossil

Asian markets traded flat last week. Japan’s Nikkei 225 (JP225) decreased by 0.51% for the week, China’s FTSE China A50 (CHA50) added 2.26% for the five trading days, Hong Kong’s Hang Seng (HK50) was up by 1.59% for the week, and Australia’s ASX 200 (AU200) was negative 1.07% for the week.

The Bank of Japan’s monetary policy meeting will be held tomorrow. Japan’s Chief Cabinet Secretary Hirokazu Matsuno said on Friday that he expects the central bank to coordinate closely with the government and conduct “appropriate” monetary policy to sustainably achieve the 2% inflation target. Analysts forecast the BOJ will leave interest rates unchanged at minus 0.1%, continuing its negative borrowing cost policy. As for the inflation outlook, the BOJ is likely to revise its 2024 CPI forecast to 2.2% from 1.9% previously. The BOJ is also likely to adjust its yield curve management program, allowing long-term government bond rates to drift moderately above the current limit of 1.0%. Such YCC adjustment will have a positive impact on the yen exchange rate.