CIMB Daily Fixed Income Commentary - 19 Feb 2016

Market Roundup

• US Treasuries rallied with yields down 5-8bps by the day’s close. The two-day rally in crude oil prices was curtailed whilst gains in the stock markets were pared. In oil-related news, Saudi Arabia said it is not yet ready to cut production despite the recent agreement to freeze output with Russia if other major producers follow suit. Brent was about $34.28 this morning after momentarily hovering above $35.50 overnight.
• Meantime, economic data was slightly better than expected, with the Philadelphia Fed index of manufacturing activity up to a reading of -2.8 in Feb from -3.5  the prior month and -3.0 consensus. However, initial jobless claims for the week ended 13 Feb beat forecast to fall to 262k versus 275k consensus and 269k the prior month.
• The US Dollar strengthened amid slightly better than expected Philadelphia Fed index of manufacturing activity and paring down of recent crude oil prices, with the ICE Dollar index gaining even more ground from recent 3-month lows. Minutes from the ECB Jan meeting was released but did not provide much in new information. EUR/USD is about 1.1107 this morning versus recent high of 1.1313 last week. USD/JPY is near 113.20 this morning after dropping below 112.00 this month. Aside, the PBOC said it will start conducting open-market operations every business day, which should strengthen its influence on liquidity and interest rates in the interbank system – without resorting to direct policy rate actions or moves in SRR which could impede currency stability.
• Malaysian sovereign bonds moved in mixed direction, amid relatively thinner trading interest, despite volume remaining on the heavier side at RM3.7 billion. Gains were slanted towards GII papers, particularly on the front and bellies of the curve.
• Malaysia’s full year 2015 GDP moderated to 5.0%, from 6.0% registered in a year before, in line with 4.5-5.5% government estimate. We think that the decent GDP number will continue to support sentiment in the near term.
• IDR government bond market opened a bit firmer with wide bid/offer spread.  We felt market turned cautious ahead BI MPC meeting on Thursday as market stuck in the opening range level. We saw heavy trading in short end tenor (1 to 2-year) and sporadic buying in selective series particularly FR56 and FR73. BI cut rate by 25bps to 7%, and lowered deposit facility and lending facility to 5% and 7.5% respectively, while slashing Primary Reserve Requirement by 1% to 6.5%, quite aggressive in latest easing measure in our view. Surprisingly, bond rally post rate cut is not happening, yet FX swap go lower and spot USD/IDR creeping higher. Market volume dropped to IDR10.8 trillion.