Asia struggling for conviction

US jobs data a mixed bag

The conflicting hodgepodge of US employment data released on Friday night hasn’t given Asia much in the way of themes to hang their hats on today, complicated by a Japanese holiday reducing liquidity. An underlying theme of caution still permeates the region, but it is a very mixed picture in equity markets across the region, while currency markets look like they are stuck in the mud, going nowhere fast.

On Friday, the US Non-Farm Payrolls disappointed, adding only 199,000 jobs. The back months were revised up by 141,000 jobs, making a total of 340,000 jobs with some optimistic maths and interpretation, but that is well short of the forecast of between 400,000 and 500,000 jobs. On the other hand, the Labour Force Participation Rate fell once again to 61.90% and official Unemployment fell to 3.90%. Average Hourly Earnings rose MoM rose by 0.60%, and by 4.70% YoY, both well above forecast.

So, the challenge in the US appears to be finding workers to fill jobs, not that there are not enough jobs out there. The JOLTS data amply illustrated that earlier in the week. Headline number aside, there was more than enough to keep the inflation vigilantes awake at night, particularly hourly earnings data. A mid-year lift-off from the Fed remains on track and although the future inflation break evens are universally saying the Fed will succeed in bringing inflation back to 2.0% in the medium term, in the here and now of 2022, a different reality rules.

US equities once again headed south, and US longer-dated yields once again headed north. The playbook failed in currency markets though. Risk sentiment barometers like Australian and New Zealand dollars held steady, and the Canadian dollar rallied. Likewise, emerging market currencies said “whatever,” and major currencies actually rallied, pushing the dollar index notably lower. That helped gold rally slightly, while oil held steady.

I will circle back to currencies later on, but in Asia today, the piecemeal price action across asset classes on Friday has led to some confused price action in Asian markets today, notably equities. Part of this can be laid at the door of omicron, with Asia refusing to buy into the rich-country Western narrative that it is milder and will have a lower net impact than delta. Much of that “data,” of course, is based on heavily RNA-vaccinated countries, something much of Asia hasn’t had access to.

The evolving situation in Australia and India, with skyrocketing caseloads, won’t give much comfort. Nor will an outbreak in Tianjin in mainland China, a gateway city to Beijing. China already has widening restrictions on other cities. Hong Kong appears to have had a community outbreak as well. Australia, Taiwan, and Japan have all heightened virus restrictions to differing degrees over the weekend as well. China is especially concerning, with the mainland and Hong Kong behind a Covid-zero wall, but with low vaccination rates in Hong Kong itself, and the mainland apparently vaccinated with traditional vaccines, which don’t appear to work against omicron. The odds of a China growth shock because of omicron and Covid-zero are steadily rising by the day.

Elsewhere, China property developers are back in the spotlight as well. Evergrande faces a deadline today to persuade onshore noteholders to not force Evergrande to buy them back by executing puts. Shimao, who defaulted on a loan last week, has allegedly put all its residential and commercial projects up for sale. Finally, Modern Land, yet another troubled and defaulting developer, saw its shares start trading in Hong Kong today after a 2 ½ month suspension. Its stock fell 40% intraday after news emerged of early repayment demands on some of its senior notes. The downside risks continue to accumulate for China despite much research saying buy-the-dip/undervalued of late.

Inflation data from the US and China will dominate the economic calendar this week. China releases its CPI data on Wednesday morning while Wednesday evening sees US December CPI released. At this stage, the risks are tilted towards the downside for China’s data, and higher for the US data. The monetary divergence could see the US dollar rally, not just against the yuan, but also Asian FX and AUD and NZD. We also have US 3 and 10-year notes, and a 30-year bond auction this week, along with some heavyweight European debt auctions. With US yields rising, and 10-year German bunds approaching 0.0%, the bid to cover ratios are worth monitoring this week. Weak covers won’t be good for equities.

Finally, the Bank of Korea policy decision could get interesting on Friday if USD/KRW continues to hold above 1200.00, or we get a soft-China/firm-US CPI divergence mid-week, which causes another bout of Asian currency weakness.

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