Yen yields shares trifecta threatens Yellen autopilot

The trifecta of declines in bond yields, US equities and USDJPY (rising yen) is a rare but classic reflection that existing concerns of emerging markets contagion may be compounded by worries over slowing growth in the US.

An extension of this negative trifecta would deal a serious blow to the notion that Fed tapering remains on auto-pilot.

- The question is not whether the biggest decline in ISM manufacturing since October 2008 (in percentage terms) was related to weather but to what the extent. The 0.1% rise in December construction spending (4-month low) confirms also confirms that weather was a factor.

- The 13.2-pt plunge in New Orders to 51.2 exceeded the 12.4 drop in October 2008 and 8.6-drop in October 2001.

- Recall the 4.3% decline in December durable goods was not associated with bad weather but a sudden drop in high-ticket capital items.

- Markets may be comforted by the growing notion that more policy clarity and stabilisation will be seen in emerging markets by the time the FOMC meets in March and the Fed would have received two US jobs reports and provide more visibility with regards to the fate of the taper program.

- If weather were the main factor in damaging today’s US data releases, then it could be the factor in propping Friday’s January jobs report as the normalisation from bad weather and govt shutdown resurfaces and giant positive appears in the NFP of the unemployment rate.

Yellen’s Congressional testimony = equivalent to February FOMC

Fed Chairwoman Yellen’s Congressional testimony next week could potentially exacerbate the current sell-off in EM and US equities if she is interpreted to signal that tapering will remain on autopilot despite the developments in emerging markets and any deterioration in US asset markets. As long as equities and bond yields extend their downward movement to the extent that the 10-year falls below 2.45% would be a reflection of serious concerns by bond traders, in which case may bring the auto-pilot to a temporary pause.