More than words…

Yellen comments on interest rates send Nasdaq tumbling

Treasury Secretary (and former Federal Reserve Chairperson) Janet Yellen perhaps wished she had used less extreme words last night. Ms Yellen stated that interest rates may have to rise to prevent the economy from overheating. However, she couched that by saying the additional government spending was small relative to the size of the economy.

The retreat continued later in the day, with Ms Yellen saying a rise in interest rates was not something she was predicting or anticipating, but the damage was done. Ms Yellen may have been saying to the markets, “I love you,” but they replied, “not the words I want to hear from you.” The tech-heavy Nasdaq slumped nearly 2.0%, the S&P 500 fell 0.80%, with only the Dow Jones catching some cyclical rotation and keeping its head above water. The US dollar spiked higher, and gold fell, but interestingly we can see where all the equity money got parked as US yields actually retreated.

That should highlight to readers the risks surrounding the Non-Farm Payrolls. Ms Yellen hoped that by saying, “what would you say, if I took those words away?” It failed, and if Non-Farm Payrolls print north of one million jobs this Friday, we may see much the same price action. Except that this time, US longer-dated yields may rise, which will seriously muddy the waters of the buy-everything trade. The reaction of the Nasdaq overnight suggests that after over a year of one-way price action, some hypoxia may be setting in at these altitudes.

US ADP Employment data may give markets a hint of what is to come on Friday, with 800,000 jobs expected to be added. Admittedly, the ADP hasn’t been a great indicator of late for the Non-Farms but expect nerves to increase if it outperforms. Although the headline US Factory Orders headline was dragged down by transport overnight, the ex-Transportation for March handsomely beat, rising by 1.70%. US API Crude Inventories also collapsed by 7.7 million barrels. All hinting that the reopening of the US and its recovery momentum is accelerating, even as pricing pressures increase on hard and soft commodities and manufactured goods. None of this is consistent with US 10-year yields at 1.50% and will be less so if the Non-Farm Payrolls dish out an upside surprise.

The data has been mostly supportive in Asia today as well. New Zealand Q1 Unemployment fell by more than expected to 4.70%, while Australia’s April Markit Services PMI rose to 58.8, and ANZ’s first-half profit surged by 45%. Singapore and Hong Kong’s Markit PMIs retreated slightly but remain in expansionary territory above 50.0. Indonesia Q1 GDP and India Markit Services PMI are likely to be less rosy, but both countries’ challenges appear to be baked into market pricing for now.

The tightening of Covid-19 social restrictions in Singapore will continue to dampen spirits there, even though I believe it does not yet imperil the recovery in the city-state as yet. But with China and Japan away until tomorrow, I expect the cautious outlook enveloping the rest of Asia to continue. Covid-19 is the culprit, with Japan looking to extend the state of emergency in Tokyo and elsewhere. Singapore, Hong Kong and notably, Thailand are all dealing with the virus re-emergence, with investor nerves elevated after two weeks of watching the tragedy in India unfold. That theme is likely to continue for the remainder of the week as the street awaits direction from the US data prints.

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