Asian equity markets got off to a cautious start on Monday as a string of weak US data pointed to downside risks for this week’s June Payroll report, while hype over a possible recession still sparked a recovery rally in government bonds.
The search for safety kept the US dollar near its 20-year high, although early action was muted due to the holiday in US markets.
Cash Treasuries closed but futures extended gains, suggesting 10-year yields were at about 2.88 percent after falling 61 basis points from their June peak.
MSCI’s broadest index of Asia-Pacific stocks outside of Japan rose 0.3 percent, while Japan’s Nikkei rose 0.9 percent.
However, both S&P 500 futures and Nasdaq futures fell 0.4 percent after stabilizing only slightly on Friday.
Goldman Sachs analyst David J. Kostin noted that every S&P 500 sector energy bar posted negative returns in the first half of the year amid extreme volatility.
“The current bear market has been purely valuation driven and not the result of reduced earnings estimates,” he added.
“However, we expect consensus forecasts for earnings margin to decline, which will result in a decline in earnings per share [earnings per share] Revisions as to whether or not the economy is going into recession.”
Earnings season starts on July 15 and expectations are significantly lower amid high costs and softening data.
The Atlanta Federal Reserve’s closely watched GDP Now forecast for the second quarter slipped to an annualized -2.1 percent, suggesting the country was already in a technical recession.
Friday’s payroll report is expected to show job growth slowing to 270,000 in June, with average earnings slowing slightly to 5 percent.
But the minutes of the Fed’s June monetary policy meeting on Wednesday will almost certainly sound hawkish as the committee decided to hike interest rates by a whopping 75 basis points.
The market is pricing in about an 85 percent chance of another 75 basis point hike this month and interest rates of 3.25 to 3.5 percent by the end of the year.
“But the market has also moved to price in an increasingly aggressive rate-cutting profile for the Fed through 2023 and 2024, consistent with a growing likelihood of a recession,” analysts at NAB noted.
“Roughly 60 basis points of Fed cuts are now priced in for 2023.”
In currencies, investor demand for the most liquid safe haven has tended to benefit the US dollar, which is trading near a two-decade high against a basket of peers at 105.04.
The euro remained flat at $1.0433 and not far off its recent five-year low of $1.0349. The European Central Bank is expected to hike interest rates for the first time in ten years this month and the euro could get a boost if it decides to move more aggressively by half a point.
The Japanese yen also attracted some safe-haven flows late last week, pulling the dollar back to 135.00 yen from a 24-year high of 137.01.
A high dollar and rising interest rates haven’t boded well for non-yielding gold, which has been held steady at $1,808 an ounce after hitting a six-month low last week.
Fears of a global economic slowdown also undermined base metals, with copper hitting a 17-month low after falling 25 percent from its March peak.
Oil has generally fared better as supply constraints and the conflict in Ukraine offset demand concerns. Production restrictions in Libya and a planned strike among Norwegian oil and gas workers were just the latest setbacks for production.
Still, sellers were out early Monday, with Brent falling 34 cents to $111.29, while US crude was down 23 cents to $108.20 a barrel.