Top 5 things to watch in markets in the week ahead

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Top 5 things to watch in markets in the week ahead -- Markets are entering the closing weeks of 2023 after Federal Reserve Chair Jerome Powell said the historic tightening of monetary policy is likely over and discussion of rate cuts is coming "into view". Investors will get a final update on U.S. inflation for this year, while the Bank of Japan may be inching toward a long-awaited policy pivot. Here’s what you need to know to start your week.

1. U.S. data

Investors will get their last update on inflation for this year with Friday's release of the personal consumption expenditures report, the Fed’s primary inflation gauge.

Economists are expecting the PCE price index to remain flat for a second month in November, while the core measure that strips out volatile food and energy costs is seen rising 0.2% .

There will also be data on consumer confidence , initial jobless claims and durable goods orders , while updates on the housing sector include reports on both new and existing home sales.

Atlanta Fed President Raphael Bostic is due to speak on Tuesday.

2. Santa Claus rally?

The Dow Jones industrial average notched another record high close on Friday, and the S&P 500 ended little changed, but registered a seventh straight week of gains in its longest weekly winning streak since 2017.

Some optimism among investors dampened after Fed Bank of New York President John Williams said on Friday it was too soon to be talking about rate cuts.

"What I think we got this week is that (Fed Chair Jerome Powell) doesn't want to overly punish the economy with (rates) being higher for longer for no good reason," Kim Forrest, chief investment officer at Bokeh Capital Partners in Pittsburgh told Reuters.

"I don't know if we're going to get whatever is considered a Santa Claus rally, but it looks like all things being considered, we could drift higher from here."

3. BOJ inching towards pivot

Expectations are mounting that the Bank of Japan could end negative interest rates in the coming months, again making it a global outlier as the focus at the Federal Reserve and other major central banks turns to when to begin cutting rates.

A change is unlikely to come at the BOJ’s upcoming policy meeting on Tuesday, but investors will be scrutinizing the bank’s rate statement for any indications that a pivot could come at its next meeting in January.

That expected pivot, plus the Fed's dovish tilt, has pushed the yen back to the stronger side of 141 per dollar for the first time since July.

BOJ Governor Kazuo Ueda said last week the central bank was facing an "even more challenging" situation at year-end and at the start of 2024, jolting markets as speculators ramped up bets that a policy shift was imminent.

4. Gold on track for first annual gain since 2020

Gold is on track to notch up its first annual increase since 2020, fuelled by a weaker dollar and growing expectations for rate cuts in 2024.

Lower interest rates increase the appeal of holding zero-yield bullion.

Real U.S. 10-year yields have been rising non-stop since early 2022, but only turned positive in June, knocking gold back from a near-record. They are now at their highest in eight years, but this has been no barrier to gold vaulting above $2,000 an ounce. And yet the price is still some 20% below its inflation-adjusted all-time high above $2,500 in 1980.

Investors are banking on a flurry of rate cuts next year, while political and economic uncertainty are on the rise - potentially heralding a sweet spot for gold investors.

5. U.K. data

U.K. inflation is currently running at more than double the Bank of England's 2% target and the latest data on Wednesday is likely to confirm price pressures remain elevated compared to other major economies.

The pound hit a three-month high against the euro this month after euro zone inflation dropped sharply, fueling speculation the BoE will take longer to cut rates than the European Central Bank.

But high rates could also tip the U.K. economy, which the BoE expects to flat-line in 2024, into recession, meaning sterling strength is not a one-way bet. The pound's fate rests on whether the BoE keeps reacting to current inflation trends or takes the longer-term view that economic weakness will dampen wages and prices.

--Reuters contributed to this report

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