Tragedy in Japan

To start we have some breaking news from Japan, where it appears that former Japanese Prime Minister Shinzo Abe has been shot while making a speech in the city of Nara. Mr Abe is being rushed to hospital as I write, apparently. As we wait for more details to unfold, there have been some noticeable impacts on Japanese markets. The Nikkei 225 has unwound all its early rally, falling to unchanged. Meanwhile, some yen haven buying is going through forex markets, pushing USD/JPY down 0.40% to 135.40. Still, it’s only money, and my thoughts are with Mr Abe and his family at this time.

Elsewhere, we saw recession fears ebb on Wall Street overnight once again, with stock markets racing to price in a lower terminal Fed Funds rate because of slower growth, or as I call it, any desperate reason to buy the dip. It came despite a sharp rally in oil markets, where there really is a genuine reason to buy the dip, and despite two Fed officials calling for a 0.75% rate hike this month, pushing US yields slightly higher.

I won’t try to overanalyse it; needless to say, today’s lower terminal Fed Funds buying excuse can just as quickly become tomorrow’s recession/inflation sell-everything move. Readers should resist the temptation to get caught up in the day-to-day noise; it’s an easy way to end up crossing spreads and get whipsawed, and it is clear that the US equity market has no idea which way the tree will fall either.

Markets await US nonfarm payrolls

One point of volatility this evening is the US Non-Farm Payroll data. The street is forecasting an additional of 268,000 jobs, down from last month’s blockbuster 390,000 print, but still pretty decent. Unemployment is expected to remain steady at 3.650%. The back-month revisions may drive volatility more than the headline and trying to predict the market reaction ahead of time is usually a lose-lose situation, as is trading it in the 30 minutes after the release as the gnomes go crazy. Given the complacency around the path of Fed rate hikes this week, in the context of an apparently looming recession, my best guess is that a high number will provoke a stock market sell-off. The logic is we were wrong about fewer Fed rate hikes, and better sell equities, especially the Nasdaq. Conversely, a lower number which would point to a slowing economy likely means the gnomes of Wall Street will decide they were right about fewer rate hikes, so buy everything, especially the Nasdaq. Obviously, a recession isn’t a conducive environment for equities either, but why let the detail get in the way of the preferred story?

Other news doing the rounds this morning is that China is considering allowing local governments to bring forward CNY 1.5 trillion (USD220 billion) worth of bond issuance from their 2023 quotas, into H2 2022. The bonds, which are mostly used to fund infrastructure, would give a healthy dose of stimulus to try and get the Chinese economy back on track to meet those ever-distant 2022 growth goals. In the short term, that should be a positive for China markets, although the price action on mainland and Hong Kong equity markets is underwhelming. If true, I would say that it isn’t a sea-change approach from China, more an accounting smoke and mirrors. NPV-ing next year’s infrastructure spending into this year would be a nice short-term boost, but if they don’t also increase the 2023 bond issuance quotas as well, net-net, it’s a zero-sum game.

The rest of the day’s calendar in Asia is dull, with a recovery in Japanese Household Spending rightly forgotten after the Abe news. Malaysian Industrial Production and Indonesian Consumer Confidence are unlikely to move the needle. Taiwan Industrial Production will only be interesting if the trade balance retreats sharply, raising Asia slowdown concerns. Europe’s data releases are also strictly tier-2 as well, leaving markets to follow the US overnight lead to some degree, or headline watch until the US Non-Farm data is released tonight.

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