Asian traders took a breather today after a recent rally, with Tokyo hit by a strong yen following a shock slump in the USA service sector that ended prospects of an interest rate rise this month.
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USA services sector activity slowed to a 6-1/2-year low in August amid sharp drops in production and orders, pointing to slowing economic growth that further diminished prospects for a near-term interest rate hike.
The dollar index, which measures the greenback against a basket of major currencies was flat while world stocks, which flourish in low interest rate environments, jumped to the highest level in year.
Sterling, which topped $1.34 for the first time in seven weeks on Tuesday after the ISM data, pulled back 0.5 percent to $1.3376 after British manufacturing output fell 0.9 percent in July, its biggest drop in a year.
The services data “suggest that the market will be tipping towards no Fed hike in September”, said Aaron Kohli, a fixed-income strategist at BMO Capital Markets in NY.
The dollar bought 101.30 yen in Tokyo, down from 101.99 yen in NY and well off the 103.61 yen in Asia earlier Tuesday.
“The trifecta of awful ISM manufacturing and non-manufacturing PMIs and weaker-than-expected non-farm payrolls have left the quixotic calls for a September rate hike dead in the water”, Angus Nicholson, a market analyst in Melbourne at IG Ltd., said in an e-mail to clients. The move was a sign of returning economic stability, but the Fed has balked at further increases after a dismal jobs report in May and slower-than-expected economic activity.
The yield on the two-year Treasury note, the coupon maturity most sensitive to Fed policy expectations, on Tuesday fell 6 basis points, or 0.06 percentage points, to 0.73 percent.
“Two per cent was not given to us on a stone tablet”, Williams said.
A top Federal Reserve official on Tuesday repeated his call for gradual interest rate hikes, evidently unfazed by a slowdown in USA job gains and sluggishness in the services sector that now has traders betting against any rate hike at all this year.
Australia’s dollar rose for a fifth day in the longest winning streak since March.
Tokyo closed down 0.4 per cent as the yen extended gains against the dollar following the US PMI reading. Bill Gross, manager of the Janus Global Unconstrained Bond Fund, now says a September hike is “close to 100 percent”, while his former firm, Pacific Investment Management Co., stuck to a call that action this month “is very unlikely”.
Automaker Toyota is losing more than 1 percent and Honda is down 1 percent.
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Brent crude futures stood at US$47.49 per barrel, up 0.5 per cent on the day and above its low last week of US$45.32.
