August 14, 2022
  • August 14, 2022

More than words… | Forex action

By on May 5, 2021 0

Yellen’s comments on interest rates push the Nasdaq down

Treasury Secretary (and former Federal Reserve Chairman) Janet Yellen might have wished she had used less extreme words last night. Ms Yellen said interest rates may have to rise to keep the economy from overheating. However, she worded this by saying that additional government spending was small relative to the size of the economy.

The retreat continued later in the day, with Ms Yellen claiming that a hike in interest rates was not something she foresaw or anticipated, but the damage was done. Ms. Yellen may have said to the markets, “I love you”, but they said “not the words I want to hear from you”. The tech-heavy Nasdaq fell nearly 2.0%, the S&P 500 fell 0.80%, with only the Dow Jones catching up on a cyclical rotation and keeping its head above water. The US dollar has soared and gold has fallen, but it’s interesting to see where all the stock money has ended up as US yields have indeed fallen.

This should highlight to readers the risks surrounding the non-farm payroll. Ms. Yellen hoped for that by saying, “How about if I deleted those words?” It failed, and if non-farm payrolls print north of a million jobs on Friday, we could see roughly the same price action. Except this time around, longer-term US yields could rise, which would seriously muddy the waters of trade at all. Nasdaq’s reaction overnight suggests that after more than a year of one-sided price action, some hypoxia may set in at these altitudes.

Data on ADP’s US employment can give markets a glimpse of what’s to come on Friday, with 800,000 jobs expected to be added. Granted, ADP hasn’t been a good indicator lately for non-firmers, but nerves are expected to increase if it outperforms. Although the US factory order title was slowed down by overnight transportation, the ex-March Transportation beaten sharply, rising 1.70%. US stocks of API crude also collapsed by 7.7 million barrels. All of this suggests that the reopening of the United States and its recovery momentum is accelerating, even as price pressures increase on raw materials and commodities and manufactures. None of this is consistent with US 10-year yields at 1.50% and will be less so if non-farm payrolls come as a surprise on the upside.

The data was also mostly favorable in Asia today. New Zealand’s first-quarter unemployment fell more than 4.70% than expected, while Australia’s Markit Services PMI in April rose to 58.8 and ANZ’s first half profit jumped by 45%. Singapore and Hong Kong Markit PMIs fell slightly but remain in expansionary territory above 50.0. Indonesia’s first-quarter GDP and Markit India’s services PMI are likely to be less optimistic, but the challenges in both countries appear to be built into market prices for now.

The tightening of Covid-19 social restrictions in Singapore will continue to tarnish minds there, although I believe it does not yet jeopardize the city-state’s takeover. But with China and Japan far away until tomorrow, I expect the cautious outlook surrounding the rest of Asia to hold. Covid-19 is the culprit, with Japan seeking to extend the state of emergency in Tokyo and elsewhere. Singapore, Hong Kong and most notably Thailand are all facing the reemergence of the virus, investors’ nerves raised after two weeks of watching the tragedy in India unfold. This theme is likely to continue for the rest of the week as the streets await the direction of US data prints.