Ahead Today
G3: US Non-Farm Payrolls
Asia: China CPI, China PPI
Market Highlights
US 10-year Treasury yields fell to around 4.15% while the Fed Fund futures priced in more US rate cuts, with the next cut now fully priced in for the June meeting, and coming ahead of non-farm payrolls numbers out later today. From an FX perspective, the clearest impact was on USD/JPY with the pair falling below the 155 level, while trends in the Dollar and risk sentiment was mixed.
Driving this was a weaker than expected US retail sales print in December, with no growth for the month relative to consensus expectations for a 0.4% mom rise. This comes ahead of the holiday season, and was even before the impact of an extreme cold winter snap in January showed up in the numbers. Eight out of 13 retail categories posted decreases, including declines at clothing stores and furniture outlets, while sales at auto dealers also fell. Meanwhile, latest data available for January showed a decline in auto sales and air travel perhaps in part due to weather related disruptions, and this will increasingly cloud the path ahead for the Fed.
The consensus is expecting non-farm payrolls to rise to 68k in January from 50k the previous month, while markets will likely also watch closely to see whether unemployment rates rise from here. Given the declines in latest job vacancy rates already seen to 3.9% from 4.2% previously, the historical relationship as per the Beveridge curve could suggest a faster pace of increase in unemployment rates from here, even as the absolute levels may remain relatively low. This is as per Governor Christopher Waller’s framework, and if right through 2026, could suggest that the US rates market may still be underpricing Fed rate cuts right now. We continue to see the Fed cutting rates three times more this year, bringing the Fed funds rate down below 3% with an important caveat being how Kevin Warsh the Fed Chair nominee will conduct policy from here.
Looking closer to home, how can we square the soft labour market and retail sales numbers in the US with what we see in Asia? In particular, Asia’s exports have remained extremely strong and if anything have been accelerating. This is even after taking into account the Lunar New Year related seasonal distortions to the extent possible.
We think there are at least two reasons driving this divergence. First very strong AI-related tech demand continues to support Asia’s exports and in particular the electronics and semiconductor/memory chip exporters in our region such as Taiwan, South Korea, Malaysia, among others. Second, Asia exporters outside of China have been raising export prices to offset tariffs to some extent, and this is reflected in the US import price numbers out yesterday showing an increasing divergence between import prices from China versus ASEAN. In many ways Asia’s exports have been outperforming global trends.
Moving forward, we hold onto our preference in Asia FX for tech exporters such as KRW, TWD, MYR and to some extent SGD to outperform.
