Financial conditions noose tightens

The new month has not signalled a new dawn for financial markets, and the noose of tightening financial conditions – a soaring dollar, rising bond yields, aggressive expectations for central bank policy rates – is choking investor sentiment even more.

US manufacturing data was the catalyst for Thursday’s dollar surge to a fresh 20-year high, the two-year US Treasury yield rising above 3.55% for the first time since 2007, and money markets pushing the Fed’s implied ‘terminal rate’ close to 4.0%.

Investors in Asia in particular will have noted the dollar’s rise above 140.00 yen, a new 24-year peak. Given the polar opposite US and Japanese monetary policy stances, few would bet against the dollar soon testing 150 yen for the first time in over 30 years.

Wall Street snapped a four-day losing streak on Thursday, but the pullback was shallow.

Attention will focus squarely on the US non-farm payrolls data for August, and a strong report will likely intensify the view that rates are headed higher for longer.

Economists expect the pace of job growth to slow to 300,000 from over 500,000 in July, and the unemployment rate to hold steady at a historically low 3.5%. Anything in that ballpark could firm up expectations of a third consecutive 75 basis point rate hike later this month.

On the political front, US-China relations could also drag on investor confidence Friday. On top of long-standing tensions over Taiwan, Washington has imposed new restrictions on exports of cutting-edge chips from Nvidia Corp. (NVDA) to China.

Nvidia shares slumped nearly 10% Thursday.

Key developments that should provide more direction to markets on Friday:

S Korea inflation (July)

Japan money supply (Aug)

US jobs report (Aug)

(Reporting by Jamie McGeever in Orlando, Florida; Editing by Andrea Ricci)