Asia shares skid, dollar gains as yields spike

Asian shares slid on Monday after a run of upbeat economic data from the United States and globally lessened the risk of recession, but also suggested interest rates would have to rise further and stay up for longer.

Bond markets took a beating in the wake of 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 131.80 yen but still helped the dollar hold firm on a basket of currencies at 103.050 , having jumped 1.2 per cent on Friday. The euro was huddled at $1.0790 after shedding 1.1 per cent on Friday.

In equity markets, MSCI's broadest index of Asia-Pacific shares outside Japan fell 1.9 per cent, with South Korea down 1.0 per cent. Chinese blue chips lost 1.6 per cent.

Japan's Nikkei added 0.7 per cent, encouraged by hopes the BOJ would keep policy easy. EUROSTOXX 50 futures fell 0.6 per cent and FTSE futures 0.3 per cent.

S&P 500 futures and Nasdaq futures both eased 0.3 per cent 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.

"The employment report changed the landscape of labor markets, increasing the possibility of a soft-landing scenario where the economy avoids a severe contraction while inflation/wage growth continues to moderate," said analysts at Nomura.

"We believe economic conditions will remain too firm for the Fed to cut rates in 2023."

Bond Reversal

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

Likewise, yields on two-year Treasuries were now up at 4.35 per cent, compared to 4.09 per cent before the data, while 10-year yields climbed to 3.55 per cent.

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 US 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 per cent on Friday and was last holding at $1,875 an ounce.

Oil futures steadied on Monday, having lost 3 per cent post-payrolls. Brent edged up 22 cents to $80.16, while US crude firmed 15 cents to $73.54 per barrel.