US yields firmed overnight, notably in the 30-year tenor. Hopes rose overnight that the Biden stimulus would pass through the US Senate relatively intact. The prospect of a juicy wave of government spending and borrowing sent longer yields higher, boosting the US dollar, but also lifted US equities, with Wall Street’s rally resuming.
Significant casualties of note were the euro and the Australian dollar, both of whom were looking wobbly of late anyway. But it was gold that really felt the pain of higher US yields and a stronger greenback. Gold fell 2.20% to USD1793.00 an ounce, leaving it desperately wanting someone to call it indestructible and to believe in its soul as an inflation hedge.
Gold may be bound to return, but with the longer-term market structurally long, and a higher dollar eroding its foundations, gold may feel less Spandau Ballet, and more Spandau Prison in the short-term. Critical support remains the 50.0% Fibonacci of the March to August rally at USD1760.00 an ounce. Failure sets up a capitulation trade into next week. Gold, something I should have learned, you’re indestructible, but you will look even more indestructible when your price starts with a 15 or 16.
80’s reminiscences aside, with its centre-part and flat-top haircuts and narrow legged shiny grey suits and green screen monitors, tonight’s US Non-Farm Payrolls assumes a greater than expected prominence after the rise in 30-year yields. The ADP Employment survey released earlier this week impressively outperformed, and if recent correlations hold intact, points to a much higher NFP number than the market’s consensus of 50,000 jobs added. A print well above 100,000 could spur another hike in longer-end yields on the US curve, with more dollar strength exacerbating the steady short squeeze through much of January. Equities won’t take fright at this stage as more jobs equal faster recovery, equals higher growth equals buy everything. FOMO, Economics, 101.
In Asia, the data picture has been more mixed, but not enough to knock markets off their post-Wall Street afterglow. Japan Household Spending and South Korea’s Trade Balance outperformed, but Indonesian GDP disappointed. YOY growth coming in at -2.19% and QoQ missing badly at -0.42%. Philippines CPI has a distinctly stagflationary smell about it, with interest rates at record lows, growth falling but prices rising. January CPI YOY rose by a much higher 4.20% versus 3.50% expected.
That should take any further rate cuts off the table by the central bank now. Both Indonesia and the Philippines continue to struggle badly with Covid-19, and the data this morning highlights the recovery gap between North Asia and ASEAN, so prevalent in 2020. ASEAN will return but isn’t likely to accelerate until mid-year.
Today’s highlight in Asia is the Reserve Bank of India rate decision, coming just four days after the fiscally expansionary 2021 budget. That government’s borrowing requirements may well endanger its investment-grade credit rating. That said, in a zero per cent world, I suspect that any offshore borrowing by the India government will have bond investors forming a less than an orderly queue. The RBI will be under pressure to cap domestic borrowing costs though, and with stagflationary pressures easing recently, a 50-basis point cut could emerge today. The SENSEX is up nearly 8.0% for the week, powered by the budget largesse. It could jump again if the RBI delivers.