Wayne Cole

SYDNEY – Asian share market were calm Monday, as investors waited for another U.S. inflation reading. These could be the trigger for an immediate rate increase by the Federal Reserve. The Federal Reserve may also raise bond yields and penalize tech stocks.

Global coronavirus outbreaks are threatening to slow consumer spending and grow, just as the Fed considers cutting liquidity. This is a difficult decision for markets that have become dependent on cheap cash.

The market was therefore cautious in its early days with an initial decline of 0.2% and a Nasdaq futures drop of 0.1%.

MSCI’s Asia-Pacific share index was nearly flat outside of Japan. South Korea, however, lost 0.7%. After falling 1.0% last Wednesday, the index is now stable.

Analysts believe that the Wednesday U.S. consumer prices report will indicate core inflation rising to 5.4% (the highest since decades) and prompt a rise in rates as early as March.

Although December payrolls numbers were not as expected, the decline in unemployment to 3.9% and the strength of wages suggest that the economy is short on workers.

“It was consistent with the Fed’s evolving view that the labour market is getting close to or is already at maximum employment with wage pressures building,” said analysts at NatWest Markets.

“This should add to speculation about a March hike, and we have pulled our expectation for the Fed’s lift-off to occur in March instead of June.”

Fed officials from all levels will present their thoughts this week. This includes Governor Lael Brainard and Chair Jerome Powell, who are facing confirmation hearings.

Futures markets quickly changed to reflect these risks. They indicate a greater than 70% chance that futures will rise by 0.25% in March, and at least another two hikes by the year’s close.

Investors switched from technology stocks to growth stocks, and bonds were beaten.

Yields have shot up by 25 basis points since last year’s biggest jump in late 2019, putting them at 1.755%. Next chart targets are the 1.95/1.97% region. [U/S]

Capital Economics economist Nicholas Farr stated that “we think the increase in long-dated Treasury Yields has further to go.”

Markets might still underestimate how much the federal funds rate is likely to increase in the coming years. Therefore, we forecast that the yield on the 10-year note will rise another 50bp to 2.25% by 2023.

Although the Fed’s shift to hawkish tends to favor the U.S. Dollar, it did run into profit taking Friday following the disappointing payrolls report.

After falling 0.5% Friday, the index was still flat at 95.764. However, it has support at 95.568.

It bounced up to $1.1354, putting it at the top of its recent trading range $1.1184/1.1382. With the dollar falling from last week’s 116.34 peak, the Japanese currency saw its bear run end at 115.64.

Gold was slightly firmer in commodity markets at $1795 per ounce, but less than its January peak at $1831.

Early trade saw oil prices fall after they rose 5% last week due to supply disruptions caused by unrest in Kazakhstan, and outages at Libya. [O/R]

A barrel of oil dropped 28 cents to $81.47, and a barrel of gasoline fell 36 cents. The price for $78.54 was down by 36 cents.

Graphic: Asian stock markets : https://product.datastream.com/dscharting/gateway.aspx?guid=516bc8cb-b44e-4346-bce3-06590d8e396b&action=REFRESH