Dude, where’s my toys?

US Treasuries move higher

The US bond market tantrum returned last night, not a full-blown one, mind you, just enough for the baby to throw a few of its toys out of the pram. US 10-years firmed to 1.47%, having tested 1.50% earlier in the day. US 30-year yields climbed to 2.25%. The five-year breakeven rate, a measure of future inflation expectations, hit 2.50%, a level last seen in 2008.

The move by bond yields was somewhat surprising given that the ADP Employment data for February was disappointing, adding only 117,000 jobs. The index has an opaque component weighting attached to the previous month’s Non-Farm Payrolls number, which disappointed in January and may account for the ADP miss. I remain confident that tomorrow’s February Non-Farm Payrolls will outperform, possibly well north of 200,000 jobs. What should be a bullish indicator for equities is likely to be negative in current market conditions, as bond yields will likely squeeze higher.

The culprit appears to be two-pronged. The US ISM Non-Manufacturing PMI retreated to 55.8, still expansionary, but less than the 58.7 expected. Buried in the ISM sub-index, though, the Non-Manufacturing Prices index rocketed higher to 71.80, triggering the inflation alarm. Secondly, although President Biden has agreed to an income cap for stimulus cheque eligibility, it looks like the USD1.90 trillion package will ease through the Senate mostly intact. The realisation that more government debt issuance was on the way, with sentiment fragile, opened up the bond exit door.

Currency markets, somewhat surprisingly, were content to watch the histrionics in other asset classes from afar, hardly moving from the day before. That doesn’t mean that the creeping US dollar strength has left the building; the technical picture on several major currencies remains ominous. Having seen these bond levels already, currency markets will need to see more pain in that space to awaken from their slumber.

The same cannot be said for equity markets. What caught my attention overnight was that the markets seemed to realise that the higher inflation is “good” inflation. A function of the global recovery and not a wage/price spiral. The cyclical-heavy Dow Jones emerged relatively unscathed overnight. Meanwhile, the Nasdaq and S&P 500, laden with tech-heavy Caligula’s of extended FOMO working from home valuations, were removed from the bar for wearing trainers.

A similar pattern is playing out in Asia today. The North Asia winners of the rally from the March 2020 capitulation, Japan, China, South Korea, and Taiwan, are being stretchered off the field today. Meanwhile, the ASEAN markets of Singapore, Malaysia, Indonesia and Thailand, laden with dull banks, property and resource stocks, are holding their own.

The technical pictures have been screaming downside correction for some time on a number of important equity markets. The Nasdaq broke down last week; the S&P 500 is in the process of doing so. The Nikkei 225, Shanghai Composite, CSI 300, ASX 200 and Hang Seng are all either breaking lower or about to test critical supports that, in most cases, extend back to the March 2020 lows. I am sure I have missed a few others as well.

Any developments from today’s annual meeting in China of the impressively named National Committee of the Chinese People’s Political Consultative Conference, and any other data releases globally, will probably be ignored now. Instead, all eyes and ears will be on the Federal Reserve Chairman Jerome Powell. Mr Powell is taking part in a discussion at the virtual Wall Street Journal Jobs Summit this evening. Markets will be looking for signals from Mr Powell regarding his comfort with rising bond yields, inflation, and any signs of potential changes in Fed guidance. He will have to choose his words very carefully this evening.

Lost in the noise of overnight developments, Bank Negara Malaysia will announce its latest rate decision today. Having held its nerve through Covid-19 part two in Malaysia, BNM will almost certainly keep rates unchanged at 1.75%. That will be a wise course of action given that any bond-driven US dollar strength would weigh on the ringgit. The ebbing of Covid-19 cases and the rise in oil prices will provide BNM with the confidence to keep its monetary powder dry.

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