By Vishnu Varathan, Head, Economics & Strategy, Asia & Oceania Treasury Department, Mizuho Bank, Ltd.,
Kabul Bombings …
The two Kabul airport bombings, which killed at least a dozen US soldiers and more than 60 civilians, has brought geo-political risks to markets.
And US equity markets that had all been happy to look past the Afghan crisis all week, slipped 0.5%-0.6%; snapping record rallies. But to be sure, the trouble is not that markets are alarmed.
But rather, that markets have only made a passing and cursory acknowledgement to geopolitical risks. Here’s the evidence.
First, UST yields have barely reacted, with the shifts being towards mild 1bp uptick to 1.35%. So there is no palpable flight to safety that would have typically seen a slump in yields.
What’s more, Gold, barely budged after a half-hearted 0.7% twitch to the Kabul bombing; just fractionally higher. Not quite the Gold spike expected with proper geopolitical “risk off”.
Moreover, the subdued reflex was also on show in FX land. USD index up some 0.2-0.3% is just shuffling, not even symbolic “risk off”. And the (USD/)JPY was not even visibly stirred at 110.
AUD slipped from above mid-0.72, but buoyed above 0.72 is consolidation not capitulation.
Upshot being, Kabul bomb blasts reflect an on-going, horrific human tragedy; and justifiably dominating headlines.
But let’s not pretend it is driving the bottom-line of self-serving markets. Because it is not; apart from coinciding with opportunistic pre-Jackson Hole profit-taking.
… Defer to Jackson Hole
Whereas, markets are in deference of Jerome Powell’s address at Jackson Hole later today; possibly turning more cautious on hawkish Fed talk (Bullard, Kaplan, George) in the lead in.
Fed Kaplan walking back (new found) restraint on taper due to delta risks, (now declaring no “material” impact from delta), calling for a September taper announcement; along with a more hawkish Bullard looking to end taper in Q1 2022 challenges a sanguine Jackson Hole view.
In that context, Jackson Hole clarification from Jerome Powell is accentuated as a catalyst. To be sure, despite the “risk on” mood heading into Jackson Hole, which arguably points to an accommodative enough Fed tilt to keep markets buoyed, thin trading in the US bond markets this week suggests latent caution; and sideline bias in search of more clarity.
So, as overrated as Jackson Hole’s significance may be, there is no denying that the quest for policy clarity will only gain momentum. Post-Jackson Hole sensitivities are likely to be more elevated, led by UST market reactions to in-coming data.
Post-Jackson Hole Yield Sensitivity to Data
Given that UST yields currently still appear to be predicting greater slowdown in US economic momentum; and imaginably attendant dovish calibrations in response, sensitivity of UST yields to in-coming US economic data is likely to be heightened.
Especially, in the context of realized economic outcomes being reconciled to expectations. And this squares with the Fed’s shift to greater “data dependence”.
All things being equal, with more weakness being baked in, the bar will be higher to get yields significantly and durably lower.
Whereas, sufficient economic resilience, and in particular a bottoming in recent pullback in US economic momentum, to keep the Fed on track for late-2021/early-2022 taper may be congruent with higher yields. Especially if worst case scenarios of acute risk aversion and/or large negative economic shock are averted; thereby diminishing safe haven demand for USTs and reducing the attendant suppression of yields.
Credit: Mizuho Bank Ltd
Catch Vishnu Varathan, Mizuho Bank, market insights on biztech Asian Midday Marketwatch