Powell disappoints, China decides

OPEC+ suprises with extension to cuts

Last night was heavy on surprises leading to plenty of drama. OPEC+ wrong-footed markets by leaving their production cuts intact for another month, delivering a 150,000 bpd increase to Russia and Kazakhstan, with oil prices rocketing higher. Federal Reserve Chairman Jerome Powell chose not to dampen the inflation fires as well. Sticking to his previous guidance that the recent inflation was transitory, expressing comfort with present moves in the markets, and that the Fed was very much focused on assisting the recovery in employment.

US longer-end bond yields spiked, with the 10-year climbing back over 1.50%. The US dollar rallied impressively while equities and precious metals endured another torrid day. The Nasdaq’s downside breakout is unequivocal now, closing below its 100-day moving average overnight, having fallen through near one-year support last week. The S&P 500 closed below its one-year support line overnight, and the Dow Jones is in danger of doing the same thing.

The rise in US yields apparently being greenlighted by the Fed chairman will be of some concern in Asia. Most of the region runs direct or dirty pegs to the US dollar; the rise in US yields means that parts of Asia will be forced to tighten into what is still-muted domestic demand across the region. Either that or allow their currencies to depreciate; an effective tightening if you are running a current account deficit. If you also have large amounts of foreign-denominated debt, the situation becomes murkier still.

Mortgage rates are almost certain to creep higher in Hong Kong and Singapore as a result, but with a vast savings base, the fallout is limited. Philippines inflation rose to 4.70% YoY today, well above the central bank target and where interest rates are at record lows. Like the Federal Reserve, the BSP is calling the inflation transitory. Let’s hope they are right; otherwise, the outlook will darken for the Philippines yet again. You can add India and Indonesia to the club as well, although foreign-denominated debt is what weighs on my mind there.

Thankfully, any fallout has been limited in Asia thus far thanks to China, which has kept the yuan firm in a 6.4000 to 6.5000 range this year. If the DM currencies in the yuan basket take a severe turn for the worse and dollar strength accelerates, that could all change, and so could the outlook for regional Asian currencies.

China itself may be able to limit the fallout from Wall Street in Asia today. The National People’s Congress is meeting today, announcing targets for the next five-year plan. Already China has announced a 6.0%+ GDP target for this year, having dropped the target entirely for 2020. They have also expressed interest in deepening trade with South Korea and joining the Regional Comprehensive Economic Partnership (RCEP). Also expected will be announcements on massive investments in technology research to increase self-sufficiency. All will be positive for Asia and may take the edge off the gloom.

Temporary salvation for equity markets could appear tonight in the shape of the Non-Farm Payrolls. Markets have priced in a 170,000 jump in employment, and if the number badly underperforms, bond markets may grant equities a stay of execution. A hefty outperformance will see the guillotine blade drop.

Unfortunately for equity markets, though, the Biden USD1.90 trillion stimulus continues to make its way through the Senate, and despite party-line voting and procedural delaying tactics, looks likely to pass relatively unscathed. A massive dose of stimulus thrown onto a recovering US economy will likely result in another spike in yields, with oil’s epic rally overnight fanning the inflationary fire from now on.

I actually agree with Jerome Powell. We see the input cost inflation is non-sticky inflation, dropping out of the CPI calculations after one year. It is also a positive sign that the global economy is recovering, as the US does not have a mortgage on inflationary signals right now. The world was functioning just fine when oil prices were above USD100 a barrel, with nary a mention of inflation Armageddon. The world was also doodling along with US 10-years yielding 2.0% pre-pandemic.

Central banks, the ocean of money looking for a home, and every man and his SPAC, will ensure that asset price appreciation will remain on track this year. Unlike 2020, it will not be a linear progression, though, and buy the dip this year might actually mean buying a dip.

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Jeffrey Halley

Jeffrey Halley

Senior Market Analyst, Asia Pacific, from 2016 to August 2022
With more than 30 years of FX experience – from spot/margin trading and NDFs through to currency options and futures – Jeffrey Halley was 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 and Channel News Asia as well as in leading print publications such as 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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