Data-dependent Fed spurs volatility

The uneven manner in which economic data painted the US recovery is encouraging the markets to behave in an erratic fashion.

The U.S. Federal Reserve Building stands in Washington, D.C.
Source: Bloomberg

All this was because of the Fed’s pledge to make an interest rate adjustment decision based on data.

Put differently, they want to see consistent signs of improvement in the US economy before raising the policy rate, after nearly a decade of very low interest rates.

The by-product for this approach is that investors now hang on to every notable data point out from the US and react accordingly.

Case in point was yesterday’s retail sales, which barely grew in April after a 0.2% drop in Q1, the first quarterly decline in almost three years.

The reaction was immediate as USD was sold off. The Dollar Index was whacked below 94.0 to a six-week low.

While the economists are expecting the Fed liftoff to begin in September, poor economic numbers are fast depressing the odds. Meanwhile, weak sentiments following the data were aggravated by concerns that the bond selloff is not quite finished as yields climbed back up.

As a result, European and US markets underperformed during the overnight session with investors also reacting to lower-than-expected Germany GDP data.

Asia to be under pressure

While there are some data due in the Asia docket, nothing in there is likely to keep traders excited. This will see attention trained on global developments. We are calling major indices in Asia lower - CSI300 4627 -91, Hang Seng 27237 -12, Nifty 8232 -3, and MSCI Singapore 387.62 -0.4. Asian currencies, however, should strengthen modestly on the back of a softer dollar.

This could provide some respite to the Korean won, which was the worst performing currency in Asia on a month-to-date basis. KRW was affected by the global bond selloff which also pushed South Korea’s sovereign bonds lower.

On the calendar, BSP will be announcing its rate decision where the market is expecting a rate hold. In Japan, preliminary estimate of machine tools orders for April could be of interest.

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