Powell dishes out cold reality check

Nov 10 – Asian markets are set to end the week with a bump on Friday, after Fed chief Jerome Powell the day before warned that US interest rates may need to rise further to win the war on inflation.

Powell’s remarks were a swift reality check for those who had become increasingly convinced that the Fed’s tightening campaign was over – the 10-year US Treasury yield had gone as low as 4.4750% late in the Asian session on Thursday, but closed the US day at 4.63%.

The three main US equity indices quickly sank, and ended between 0.7% and 1% lower on the day. If Asian and emerging stocks follow Wall Street’s lead, they will close the week in the red.

The rebound in US bond yields on Thursday boosted the dollar, which is quietly resuming its climb higher. It is now up four days in a row, eyeing its best week since early September, and has appreciated in 14 of the last 17 weeks.

Since mid-July, it has gained 6.5% on a broad basis. One of the dollar’s best runs has been against the Japanese yen – the dollar is now up more than 10% in that period to within one yen of the three-decade-high near 152.00 yen hit late last year.

Traders remain on high alert for yen-buying intervention from Japanese authorities, but that could just as easily come against the euro, which rose to a fresh 15-year high on Thursday of 161.80 yen.

The last time euro/yen was that high in August 2008, euro/dollar was USD 1.50 (it’s USD 1.0650 today), dollar/yen was 110.00 (it’s over 150 yen today) and the US-Japanese 2-year yield gap was 150 basis points (today it is almost 500 bps).

It’s pretty clear that, from a fundamental and yield spread perspective, the yen is much weaker today than it was then and that the dollar is much stronger. This may be one of the reasons why Tokyo seems reluctant to intervene.

Bank of Japan Governor Kazuo Ueda said on Thursday the central bank will proceed carefully in exiting ultra-loose monetary policy to avoid causing huge volatility in the bond market.

Ueda said Japan was making progress towards sustainably achieving the central bank’s 2% inflation target, but said there is “still some distance to cover” before the BOJ can fully scrap its yield curve control and negative interest rate policy.

Sentiment towards China, meanwhile, suffered another blow on Thursday after inflation figures showed that consumer prices swung lower in October.

On the political front, Chinese Vice Premier He Lifeng and US Treasury Secretary Janet Yellen hold talks in San Francisco. Yellen called for “open and substantive” discussions on the US-China economic relationship.

Here are key developments that could provide more direction to markets on Friday:

– New Zealand manufacturing PMI (October)

– India industrial production (September)

– Australia central bank issues statement on monetary policy

(By Jamie McGeever; Editing by Deepa Babington)