Why the markets went into risk-off yesterday?

Yesterday, the US Consumer Confidence report came out much better than expected after three consecutive months of decline. Compared
to the University of Michigan Consumer Sentiment, which shows more how the
consumers see their personal finances, the Consumer Confidence shows how the
consumers perceive the labour market.

Looking at the big picture, the only thing that “changed” yesterday is that some concerns on the labour market that surfaced after the NFP report should have been set aside for now. The present situation index generally leads the unemployment rate, so we might see a downtick in the unemployment rate in the next NFP report.

This should be overall a good thing for the growth picture and the risk sentiment. In fact, we did see risk assets rising following the Consumer Confidence release, but eventually the aggressive rally in Treasury yields weighed on the markets and triggered some risk-off moves across the board which accelerated after the bad 2-year and 5-year auctions.

I can see the resilience of the economy weighing on the bond market, especially the long end of the curve, as the markets push back rate cuts expectations. If this is caused more by the growth expectations rather than higher inflation fears, which is what I’m seeing right now, then it should be good news for the risk sentiment and risk assets in general.

So, in my opinion, we might see the markets fade yesterday’s risk-off moves and get back into risk-on today with the USD on the backfoot, the stock market rallying and commodities doing good.

This article was written by Giuseppe Dellamotta at www.forexlive.com.