As robust US economic data pushes rates above 4%, reaching 5% in 2-year bonds, a retreat in risk appetite is likely to weigh down Asian equities. Despite the robust ADP figures and below 250k jobless claims, there’s an air of caution as global fixed income instability increases. Particularly, sectors focused on cyclicals and value might face sustained pressure as the economy may feel the weight of higher rates over the medium term. Interestingly, one of the key indicators in the current cycle, the foreign exchange market, is showing considerable fluctuations. High-beta currencies, especially those from emerging markets, are experiencing significant weakness. This is particularly noticeable in carry trades, as the escalating US rates exert pressure across all currencies.
Currently, all market eyes are fixed on the forthcoming US Nonfarm Payrolls data. The anticipation surrounding this data will likely dictate price movements and flow, with markets heavily speculating and hedging their bets. The consensus prediction is a Federal Reserve rate hike in July, unless there’s a significant shortfall in the data. Moreover, the recent strong US economic data has raised expectations for the Federal Reserve’s terminal rate, now projected to climb to 5.45% by November 2023. If the US Payrolls data surpasses expectations, the global equities may continue their downward trajectory, further pushed by a potential rise in US yields.
