© Reuters. FILE PHOTO: Bank Indonesia’s logo is seen at its headquarters in Jakarta, Indonesia January 17, 2019. REUTERS/Willy Kurniawan/File Photo/File Photo
Author: Jamie McGeever
(Reuters) – Jamie McGeever’s view of the coming day in Asian markets.
Central bank policy decisions in Indonesia and the Philippines are in the spotlight in Asia on Thursday, giving investors a rare reprieve from a dramatic repricing of US interest rates that is increasingly defying the logic of global markets.
Or rather, the reaction of world markets and risky assets to repricing is increasingly defying logic.
This year, global stocks are up 8%, Asian stocks, excluding Japan, are up 5%, hitting a record high, up 7%, and the Nasdaq is up a whopping 15%.
US corporate high-yield bond spreads are near nine-month ranges from earlier this month, and investment-grade spreads are near 10-month ranges from just a few weeks ago.
This happened amid a stunning rise in US bond yields, market implied rates and Fed policy expectations.
According to US ‘SOFR’ forward rates, the implied Fed interest rate at the end of the year is now above 5% – four months ago it was 4% and six months ago it was just 3%. Whisper it, but a terminal rate of 6% may not be completely off the table.
Aren’t rising rates and yields meant to reduce risk appetite? There are several possible explanations – investors are still severely undercapitalized, generous global liquidity, a soft scenario or even a ‘no-landing’ for the US economy – but it’s still a bit scary.
In Asia, Bank Indonesia (BI) is expected to leave its key interest rate unchanged at 5.75%, which could mark the end of a short six-month hike cycle. Inflation in Southeast Asia’s biggest economy hit a seven-year high of 5.95% in September, but slowed to 5.28% in January.
The Philippine Central Bank (Bangko Sentral ng Pilipinas), meanwhile, is in a tighter position and is expected to post a second straight increase in its benchmark overnight rate by half a point, to 6.00%. Inflation is at its highest level in 14 years and, unlike other Asian economies, is not yet showing significant signs of cooling.
Hawkish guidance from the BSP and BI on Thursday could support their currencies. But with the US cash equivalent – 6-month Treasuries – now offering 5%, it’s going to have to be pretty tough to talk traders away from the dollar.
Also on Thursday’s data calendar are the latest snapshots of Japan’s trade balance and unemployment in Hong Kong and Australia.
Here are three key developments that could give more guidance to markets on Thursday:
– Rate decision in Indonesia
– Decision on the rate of the Philippines
– Japanese trade (January)
(Jamie McGeever)