2016, Issue V: Cautious
Eye on the Fed and UK Referendum
§ First, US Fed timeline for eventual future rate hike
remains data dependent. US growth recovery remains on track but recent global
developments out of China and volatile market activity may potentially affect
the number of hikes in 2016. Fed officials including Yellen are more
hawkish recently. Markets are now expecting 1 Fed hike in 2016; we are
expecting 1-2 rate hikes by end 2016. Key US events: ISM Manufacturing Mar
(1 Jun) (expected: 50.4); US May NFP (3 Jun) (expected: 160k); Fed Chair Yellen
to speak in Philadelphia (7 Jun); US-China Strategic Dialogue (6-7 Jun in
Beijing); FOMC meeting, May CPI (16 Jun); May durable goods (24 Jun); 1Q GDP
third print (28 Jun).
§ Second, Japan’s 2% inflation target has been pushed
back to 2H FY 2017 (by Mar 2018) due to oil softness and slow traction in wage
increases. The credibility of Abenomics has waned somewhat in 2016 even though
the easing bias is still clear. We do not expect any further moves by the
BOJ until Jul meeting at the earliest and further jawboning is likely
until then. Postponement of the consumption sales tax hike to Oct 2019 is now
very likely, removing a likely drag on the economy. PM Abe will hold a
press conference on 1 Jun to announce his decision on holding simultaneous
elections for both houses of parliament and on the sales tax hike in Apr 2017.
BOJ policy board member Sato speaks in Kushiro on 2 Jun and BOJ deputy governor
Nakaso speaks in Akita on 9 Jun and then again to the National Credit Union
Association on 24 Jun. BOJ meets on 16 Jun to decide on policy. There is also
the final print of 1Q 2016 GDP due on 8 Jun. JGB auctions in Jun: 10-year (2
Jun), 30-year (7 Jun), 5-year (9 Jun), 1-year (14 Jun) and 20-year (23 Jun).
§ Third, we expect ECB to keep monetary policy
stance status quo at the upcoming meeting (2 Jun) as ECB is determined to ease
financing conditions, stimulate new credit provision in an attempt to reinforce
growth momentum and return inflation to medium term objective of 2%.
Front-end yield differentials between 2Y Euro and UST bonds widened and may
weigh on Euro with some limits. Downside likely to be limited around 1.08 -
1.09 levels. ECB meeting, Apr PPI (2 Jun); 1Q GDP final (7 Jun);
May CPI (16 Jun); Jun ZEW survey expectations (21 Jun); Jun confidence
indicators (29 Jun).
§ Fourth, China still has excess capacity, heavily
indebted corporations and huge liquidity injections continue to add immense
pressure on the economy and the yuan medium term. PBOC continues to rely on
SLF, MLF and PSL as liquidity tools, we do not rule out interest rate cut
of 25bps and RRR to be cut in intervals by another 100bps within the
year. Activity indicators (i.e. urban investments, industrial production
and retail sales) will continued to be eyed. May PMI-mfg is due on 1 Jun
along with Caixin version. The China-US Economic and Strategic dialogue is
scheduled on 6-7th. Foreign reserves and trade data are curiously scheduled for
release on 7th and 8th respectively. CPI and PPI on the 9th. Activity data will
be released on the 12th. Liquidity numbers are due from 10th-15th. We
also like to watch Apr industrial profits due on the 27th. We also eye
potential inclusion into MSCI and JPM bond indexes.
§ We believe AXJs could see some weakness in 1H of Jun
in the run up to the June FOMC. We could see initial broad USD strength in the
lead-up to Jun FOMC and potential sell-off thereafter.
[1] Underlined
words represent new developments in the FX themes.
