It’s terminal

A look at the day ahead in Asian markets from Jamie McGeever

It is almost as if nothing else matters right now.

Short-dated U.S. Treasury yields and interest rate futures’ pricing of the Fed’s terminal rate dominate world markets, and a batch of key economic data from Japan, Australia and South Korea is unlikely to change that in Asia on Thursday.

Wall Street on Wednesday failed to rebound from the previous day’s meltdown and world stocks fell for a second straight session as implied rates and yields marched even higher.

Before Tuesday’s U.S. inflation data, the market debate was whether the Fed will raise rates next week by 50 or 75 basis points. The question now is whether it will be a 75 or 100 bps rate hike.

Traders have pushed the terminal rate up to 4.35% by March next year, and have lifted the 2-year yield above 3.80%. Some forecasts are now pointing to a terminal rate of 5% and a 2-year yield above 4%.

Is this typical market overreaction, or are these realistic targets? If it is the latter, the risk of a policy error must surely be rising.

FX markets are on heightened intervention alert from Japan after the BOJ checked market rates with banks on Wednesday, a potential prelude to direct yen-buying intervention. The yen rallied, but the ever-widening spread between U.S. and Japanese yields will only support the dollar.

Trade data from Japan, South Korea and Indonesia could give their respective currencies some steer on Thursday, while employment and GDP figures could do the same for the Aussie and kiwi dollars, respectively.

But it is all about the U.S. 2-year yield and Fed terminal rate.

Key developments that should provide more direction to markets on Thursday:

Japan import, export, trade (August)

South Korea trade (August)

Australia labor market, unemployment (August)

Indonesia trade (August)

New Zealand GDP (Q2)