When higher US yields and dollar is a good thing

Dec 11 – Asian markets are set for a positive open on Monday, taking the baton from Wall Street on Friday after a surprise fall in the US unemployment rate bolstered the view that an economic ‘soft landing’ will be achieved and recession avoided.

Looked at through a ‘good news is good news’ prism, the rise in Treasury yields and the dollar on Friday should not be a drag on Asian and emerging markets, like they often are.

The two-year US yield posted its biggest rise since June after data showed that the unemployment rate fell to 3.7%. Any lingering hopes for a rate cut this week quickly vanished, and the first fully priced rate cut was pushed back to May next year from March.

If the S&P 500 and Nasdaq’s rise on Friday to their highest levels since early 2022 lifts most Asian markets on Monday, Chinese assets may struggle after figures this weekend showed that deflationary pressures intensified in November.

Consumer prices fell 0.5% both from a year earlier and compared with October, much deeper than the median forecasts in a Reuters poll of 0.1% declines for both. The year-on-year decline was the steepest since November 2020.

Factory-gate deflation deepened too – producer prices have been falling on a year-on-year basis or more than a year now – indicating rising deflationary pressures, weak domestic demand, and increasing doubt over the economic recovery.

Figures like these will only deepen calls for more stimulus from Beijing, and are a reminder as to why Chinese markets are underperforming so much – China’s blue chip CSI 300 index has lagged the MSCI World Index, S&P 500, and Nikkei 225 this year by 24%, 27%, and 30%, respectively.

A batch of major economic indicators from Beijing will be released on Friday – industrial production, retail sales, house prices, unemployment, and business investment for November.

The Asian economic and policy calendar is light on Monday – money supply and a quarterly business survey index from Japan, and industrial production figures from Malaysia are all investors have to get their teeth into.

For the rest of the week, interest rate decisions from Taiwan and the Philippines, inflation data from India, and that data dump from China on Friday are the main regional calendar events.

But market sentiment and direction will largely be driven by the key events in developed economies. They include policy meetings from the Bank of England and European Central Bank, US inflation, and the one everyone is waiting for – the Federal Reserve’s policy decision on Wednesday.

The Fed is widely expected to keep its fed funds target range steady at 5.25-5.50%, so all eyes will be on the accompanying statement, policymakers’ revised projections, and Chair Jerome Powell’s press conference.

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

– Malaysia industrial production (November)

– Japan money supply (November)

– US bills, 10-year note auctions

(By Jamie McGeever; Editing by Diane Craft)