Good MornING Asia - 5 February 2018
The sell-off in bond and equity markets shows few signs of abating just now, with last Friday's high wages shock in the US labour report pushing at an open door with respect to market sentiment
Wages pushing at an open (bond) door - but not that unusual
Admittedly, wages growth in the US has not been this strong (2.9%YoY) since mid-2009, though shortly after this point, it fell off a cliff and by the end of that same year, was running below 2%. Also, we have been fairly close to this growth rate a number of times, hitting 2.8% twice in the last 12 months, and 2.7% also. From memory, we might also have hit 2.9% - though these wages figures have a nasty habit of being revised (always) down, so this is clearly a risk in the months ahead. That said, after warnings that the survey timing might bias the reading down, it certainly was a positive surprise and may limit downwards revisions.
The wages data also tee-up new Fed Chair, Jerome Powell nicely for a March rate hike - and make it look more likely that our house forecasts of three rate hikes this year from the Fed has some upside risk - we should now probably say "three to four hikes". Futures markets are still not quite there yet, and as this slowly gets priced in, that should keep the front end of the yield curve marching relentlessly higher.
The week after payrolls is usually a quiet one for macro releases, especially in the US. But that doesn't mean that it will necessarily be a quiet one for markets, with the lack of data adding to, not necessarily reducing any volatility.
First - momentum to dominate
What happens now is going to depend on market sentiment, not hard data. In the short term, we imagine, markets having become rather stretched (Yellen makes this point too in her parting comments), momentum likely favours a further unwinding of bonds and equities. Speculative positioning, for example in the EUR had become extreme, no doubt the same could be said for other correlated assets. So bond yields could go a bit higher, though this could be tempered by very aggressive declines on the equity market. In the backdrop of higher yields, and a steepening US curve relative to the Eurozone, the dollar could also make some further gains, and Asian currencies will likely remain on the back foot - a number, SGD, KRW, IDR to name a few, have already seen notable slides already against the USD.
Then, value to become the new driver
But there will come a point, and this is probably not too far away, when investors start to look at markets again with a view to picking up bargains. Valuation is a relative, not an absolute strategy, and there is still a lot of money in the wings waiting to be invested. It may require some further declines first before this starts to dominate trade flows, but as prices decline, the value investors should start to push back and we don't think it will be too long before we see equities, the EUR, and Asian FX moving higher again.
Download
Download opinion"THINK Outside" is a collection of specially commissioned content from third-party sources, such as economic think-tanks and academic institutions, that ING deems reliable and from non-research departments within ING. ING Bank N.V. ("ING") uses these sources to expand the range of opinions you can find on the THINK website. Some of these sources are not the property of or managed by ING, and therefore ING cannot always guarantee the correctness, completeness, actuality and quality of such sources, nor the availability at any given time of the data and information provided, and ING cannot accept any liability in this respect, insofar as this is permissible pursuant to the applicable laws and regulations.
This publication does not necessarily reflect the ING house view. This publication has been prepared solely for information purposes without regard to any particular user's investment objectives, financial situation, or means. The information in the publication is not an investment recommendation and it is not investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument. Reasonable care has been taken to ensure that this publication is not untrue or misleading when published, but ING does not represent that it is accurate or complete. ING does not accept any liability for any direct, indirect or consequential loss arising from any use of this publication. Unless otherwise stated, any views, forecasts, or estimates are solely those of the author(s), as of the date of the publication and are subject to change without notice.
The distribution of this publication may be restricted by law or regulation in different jurisdictions and persons into whose possession this publication comes should inform themselves about, and observe, such restrictions.
Copyright and database rights protection exists in this report and it may not be reproduced, distributed or published by any person for any purpose without the prior express consent of ING. All rights are reserved.
ING Bank N.V. is authorised by the Dutch Central Bank and supervised by the European Central Bank (ECB), the Dutch Central Bank (DNB) and the Dutch Authority for the Financial Markets (AFM). ING Bank N.V. is incorporated in the Netherlands (Trade Register no. 33031431 Amsterdam).