US interest rates stay above 3% and the sky has not fallen in

I have been watching the screens anxiously in the last few weeks, with US 10-year Treasury yields poised just below 3%, and chatter rising about an emerging markets sell-off. In the event, the 3% level has been achieved with minimal fuss, and markets are if anything, in an upbeat frame of mind today. Asian FX seems, on the whole, to be looking stronger today, not weaker, and so too are local stock and bond markets.

Malaysia has made the biggest turnaround, following the calming announcements and cabinet appointments from Dr Mahathir Bin Mohamad, and our other favourite amongst the Asian FX world, the Korean won, also seems to be holding on to recent gains.

Why the newly found optimism? Well, it is entirely possible that today's mood proves to be misplaced. But one explanation is that in taking so long to cross the 3% Rubicon, investors realised, correctly, that 3% is not so high, and that this really isn't that momentous after all. At the front end of the US yield curve, the latest metric to trigger doom-mongers hoped-for disaster scenarios is the dividend yield, which at 1.89% on the S&P500, now equals the yield on a 3-month T-bill. T-bills will, of course, go higher, as the Fed continues to hike rates (unless the rest of the FOMC suddenly takes note of James Bullard - the lone dove). But I always preferred the prospective earnings yield as a measure of equity return, and that still looks quite favourable against a 3% risk-free rate.

There is, of course, another story in EM bond markets. And yields have risen quite meaningfully in the APAC region since the beginning of the year, most notably for the Indonesian rupiah. The Philippine peso and Indian rupee have also lost ground at longer tenors, as investors show their preference for economies with current account surpluses in times of anxiety.

There is, though, no sense of an EM sell-off today, in spite of the US yield story. And what is happening in Argentina, is, for now, staying in Argentina (and a bit in Turkey too), not spreading to other EM markets. This may not last. But if we do see today's calm shattered in the weeks ahead, it will not be because US 10Y Treasury yields nosed up 2bp and crossed the 3% line.

China's activity data for April should be untainted by Lunar New Year distortions, so will be worth a good look today. We don't think the recent trade issues will have any bearing on today's data, with industrial production likely to firm from last month's 6.0% to 6.3%YoY (consensus 6.4%). Retail sales also should deliver a decent 10.1%YoY growth rate - up from 10.0% in March as the government's plan to boost the consumer sector of the economy gains further ground. Consensus expects fixed asset investment (FAI) to buck this positive trend, though remain decent, at 7.4% (was 7.5% in March), but we have a more optimistic take, as old industry contraction is replaced with new technology investment, and look for a rise to 7.7%.

In the G7, European GDP data will struggle to interest markets, but the UK labour market data has the possibility to keep interest in forthcoming Bank of England rate meetings if wages remain above inflation or push further ahead. Retail sales are today's big US activity release. Something around 0.3%-0.4%MoM would be in line with the recent trend, though this data is particularly choppy, and one factor that could deliver a higher sales figure is retail gasoline prices, which moved up by about 6.5% at the end of April from March.