Asia shares slip, dollar up as U.S. rate outlook shifts

Bond markets took a beating on Friday following stunning reports on jobs and services, catching speculators very short of dollars and sending the currency sharply higher.

The dollar extended its rally on the yen to a three-week top of 132.60 on Monday amid reports the Japanese government had offered the job of central bank governor to the current deputy, Masayoshi Amamiya.

Amamiya has been closely involved with the Bank of Japan’s current super-easy policies and is considered by markets to be more dovish than some other contenders.

The early gains were later pared to 131.94 yen but still helped the dollar hold firm on a basket of currencies at 103.090, having jumped 1.2% on Friday. The euro was huddled at $1.0791 after shedding 1.1% on Friday.

In equity markets, MSCI’s broadest index of Asia-Pacific shares outside Japan fell 0.7%, with South Korea down 1.0%.

Japan’s Nikkei added 1.1%, encouraged by hopes the BOJ would keep policy easy. S&P 500 futures dipped 0.2%, while Nasdaq futures lost 0.3% as the stellar January payrolls report forced investors to price in the risk of more hikes from the Federal Reserve, and less chance of cuts later in the year.

Futures are almost fully priced for a quarter point rate rise in March, and likely another in May, leaving the peak at 5.0% from 4.9% ahead of the jobs data.

Likewise, yields on two-year Treasuries were now up at 4.35%, compared to 4.09% before the data, while 10-year yields climbed to 3.56%.

A host of Fed officials are set to speak this week, led by Chair Jerome Powell on Tuesday, and the tone could be hawkish. Policy makers from the European Central Bank and the Bank of England will also be making appearances.

Bruce Kasman, head of economic research at JPMorgan, noted recent surveys on manufacturing globally had also shown a bounce in January.

“The data decisively quiet the near-term recession narrative,” wrote Kasman in a note. “It appears that underlying growth momentum did not materially slip through a noisy turn into the new year, and the U.S. expansion remains firmly on its feet.”

“Importantly, we see material risk that developed market rates will need to rise well above market estimates of terminal rates for the cycle, even as we expect the Fed to signal a pause next quarter.”

Higher rates, and thus yields, will stretch equity valuations and challenge the market’s bullish outlook for assets including commodities.

Gold, for one, slid 2% on Friday and was last stuck at $1,865 an ounce. [GOL/]

Oil futures steadied on Monday, having lost 3% post-payrolls. Brent edged up 11 cents to $80.05, while U.S. crude firmed 13 cents to $73.52 per barrel. [O/R]