Investors will track central bank moves in the week ahead as the US Federal Reserve announces its rate decision and markets across Asia announce money supply data giving an indication about liquidity and credit conditions in the region.

Wall Street now expects no change in the federal funds rate, currently between zero and 0.25%, after Friday’s blowout jobs data. The US economy regained 2.5 million jobs in May and the unemployment rate dropped to 13% as coronavirus pandemic shutdowns began to ease. A Bloomberg survey had expected the jobless rate to rise to 19.6% and a payroll decline of almost 8 million, while a Reuters survey, tipped the unemployment rate to rise to 19.8% with non-farm payrolls dropping by 7.4 million – so the news was a great relief to the government and investors.

The surprise data also caused a severe correction in fed futures and a sharp rise in US Treasury yields. Futures markets are no longer pricing in negative interest rates for the next three years compared with an expectation the rates will be negative in 2021.

“The key phrase to watch will be the characterisation of the future path of policy,” BofA Securities said in a note ahead of the June 9-10 Federal Open Market Committee meeting. “Additionally, we think the Fed will likely begin announcing asset purchases on a monthly date beginning after this meeting as opposed to the current daily pace. Looking ahead, we do expect the Fed to announce a Yield Curve Control (YCC) program to complement more explicit forward guidance in September.”

Economic data during the week will also give some indication about the latest status of the supply chain disruptions caused by the coronavirus pandemic.

IHS Markit analysts said significant supply chain vulnerabilities have been exposed by the protracted disruption of industrial production in China as well as some other major global manufacturing hubs during the Covid-19 lockdowns.

Globally, firms will aim to reduce their vulnerability to such extreme supply-chain disruption and this will also be driven by the US-China trade tensions which continue to simmer. “A key beneficiary of the shift in global manufacturing supply chains will be the ASEAN region, with Southeast Asian manufacturing hubs such as Vietnam, Thailand, Indonesia, Myanmar and Philippines likely to benefit from the greater diversification of supply chains,” Rajiv Biswas, IHS Markit’s chief Asia-Pacific economist, said.

Fund flows

Investors pulled cash out of money market funds, which saw its biggest outflow since the start of the year, and deployed them into bond markets in the week to June 3, according to fund flow tracker EPFR Global.

They pumped in a record $30 billion into all Bond Funds and High Yield Bonds posted their second largest inflow since EPFR started tracking them with US Bond Fund scoring their biggest inflows in over 17 years.

Money was pulled out of emerging market equities although ethical investment flows gained.

“A desire on the part of investors to stay out of any lines of fire between the US and China saw EPFR-tracked Emerging Markets Equity Funds post their 16th straight outflow in early June,” EPFR said, while adding that emerging markets’ Equity Funds with socially responsible (SRI) or environmental, social and governance (ESG) mandates recorded their 13th inflow over the past 16 weeks and retail flows were positive for the first time since mid-April.

But EPFR-tracked Bond Funds surged to a new record high in early June after investors added over $650 billion during 2019 and another $157 billion in the first two months of this year.

“Emerging Markets Bond Funds saw flows rebound with investors favouring those with hard currency and sovereign mandates. Hopes that a recovering China will lift commodity prices has prompted investors to take another look at this asset class. At the country level, South Africa Bond Funds attracted record inflows and investors showed solid appetite for Thai, Chinese and Colombian debt,” it said.

Economic data calendar

Last week’s ratings changes

This story appeared first on Asia Times Financial