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Analysis

Asian market set to welcome dovish Fed comments

Asian markets are set to start the day with a generally positive tone, taking cues from Wall Street's performance. The bullish sentiment comes in response to the dovish remarks made by Federal Reserve officials regarding interest rates.

Treasury yields fell, and the S&P 500 rebounded, erasing earlier losses after Federal Reserve Vice Chair Philip Jefferson's statements suggested a cautious approach to future rate hikes in light of recent increases in Treasury yields. Additionally, Federal Reserve Bank of Dallas President Lorie Logan noted that the recent surge in long-term U.S. bond rates could potentially reduce the necessity for further monetary tightening. The U.S. dollar experienced a slight decline in value. Meanwhile, futures tracking the 10-year Treasury indicate that the yield on U.S. 10's are down significantly on the dovish Fed.

But the rally is also part and parcel to the rebalancing of the jobs market, which shows some 3 million people have entered the workforce this year, the most for any full year since 2000. It may explain why wage growth is moderating, which should alleviate inflation concerns. Hence, the labour market is undoubtedly in a much better balance, suggesting there is no need to hike rates.

And this was very much suggested in Friday's post-NFP tea leaves, so now we have the official follow-up. Besides the fact that the folks who move "big money" work in mysterious ways, they also have the best technology with algorithms created by genius MIT astrophysicists that digest reams of alternative data flows that come to quantified conclusions well before the outcomes are written up in your morning business scribe; hence the market is just a quicker forward-looking machine these days.

 So today, the analyst headlines are catching up to what the quants knew on Friday: the script has changed, and there is no need for the Fed to hike.

Traders are all on board with most arguments for structurally higher yields, and that term premium repricing was entirely rational given the higher for longer Fed. Still, the market could start to push back on the idea that it'll be a one-way ticket to 5% and even more against the misguided notion that no meaningful bullish correction is coming down the pipe even if the US data turns. Indeed, the market could quickly flip to a sustained bid for bonds in the not-so-distant future, especially as the US consumer impulse is expected to wane in Q4.

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