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Asia pauses for thought

Asian markets appear to be taking a breather this morning, having led the global equity recovery yesterday. US markets found their mojo again overnight, with a day of calm on bond markets greenlighting equities to leap higher on the vaccine recovery optimism that characterised the Asian session earlier in the day.

US and Eurozone Manufacturing PMIs accelerate

US ISM Manufacturing PMI powered higher overnight, as did the Eurozone PMI’s, despite Asia delivering a Lunar New Year-affected mixed result. Fed Governor Barkin speaking yesterday, said that he wasn’t concerned by an increase in Treasury yields, with his attention much more focused on the slack in the labour market. It will be interesting to see if other Fed speakers this week convey a similar message.

Taking all of the above, along with the progress of the Biden stimulus package, as well as the J&J Covid-19 vaccine approval, with Novavax seemingly not far behind, it might be a bit premature to put those inflation fears back in the box. Even though the inflation itself is the good cholesterol type, and not the artery hardening wage/price stagnation type. That all means that we have probably not seen the last of the bond tantrum potentially, and it will be interesting to see how other asset classes, notably equities, survive that stress test.

Asian data releases this morning have not offered much insight either. South Korean Industrial Production rose year-on-year but fell month-on-month, with manufacturing soaring YoY as well. Retail Sales were flat YoY but rose MoM. Japan unemployment and job/applicants were unchanged while Australia’s Current Account outperformed, but Building Permits collapsed. South Korean and Taiwan Manufacturing PMI’s rose further into expansionary territory.

All-in-all, today’s data prints are sending mixed signals. On the one hand, manufacturing and exports remain strong, but there are hints that momentum may be slowing. A similar story told by the pan-Asia manufacturing PMI data yesterday, albeit distorted by Chinese New Year. The honest answer is it could go either way from here, but we will probably need to wait until next month’s data to draw a conclusion.

That doesn’t seem to be an issue for the United States, though, where the picture paints a rapidly recovering economy on all fronts. Shortly to be juiced by another USD1.9 trillion fiscal stimulus package. Inflationary pressures ebbing? I don’t think so, and if this Friday’s Non-Farm Payrolls outperform, equity markets may find themselves stress-tested again.

All eyes will be on the latest Reserve Bank of Australia rate decision this morning after the RBA entered the market to cap bond yield increases yesterday. Like the US and elsewhere, the yield curve has steepened markedly, with Australia performing very nicely behind its closed borders. The reference rate remained unchanged at 0.10%, and the rate statement noted that rates would remain at these levels while inflation stayed below the target level of 2 to 3 per cent.

Having unexpectedly extended QE previously, the street will be looking for signals that it remains uber-dovish and possibly takes a more active role in managing the shape of the yield curve. That will probably be positive for the Australian dollar at the fringes (like yesterday). Still, the RBA will also be setting itself on a collision course with bond vigilantes in the future potentially.

If the US yields spike again, central banks from Europe to Australia to Japan, and points in between, may find themselves scrambling to contain the fallout in their bond markets. We may have to get used to more two-way price action going forward, a well overdue and welcome development.

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Jeffrey Halley

Jeffrey Halley [4]

Senior Market Analyst, Asia Pacific
With more than 30 years of FX experience – from spot/margin trading and NDFs through to currency options and futures – Jeffrey Halley is OANDA’s senior market analyst for Asia Pacific, responsible for providing timely and relevant macro analysis covering a wide range of asset classes. He has previously worked with leading institutions such as Saxo Capital Markets, DynexCorp Currency Portfolio Management, IG, IFX, Fimat Internationale Banque, HSBC and Barclays. A highly sought-after analyst, Jeffrey has appeared on a wide range of global news channels including Bloomberg, BBC, Reuters, CNBC, MSN, Sky TV, Channel News Asia as well as in leading print publications including the New York Times and The Wall Street Journal, among others. He was born in New Zealand and holds an MBA from the Cass Business School.
Jeffrey Halley
Jeffrey Halley

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