Weak EU PMI Spurred Growth Concerns; Singapore CPI Deflation Eased in April

24 May 2016

Rates & FX Market Update

Weak EU PMI Spurred Growth Concerns; Singapore CPI Deflation Eased in April

Highlights

¨   Global Markets: Overnight DXY movements were relatively subdued on softer than expected manufacturing PMI (50.5; consensus: 51.0), even as several Fedspeak (Bullard, Harker and Williams) reiterated the live possibility of a hike in June, with the Brexit referendum unlikely to materially alter FOMC’s expectations. The UST curve continued to flatten, with 2y yields 2bps higher overnight while longer yields remained anchored; stay mild overweight USTs. Elsewhere, EU composite PMI fell to the weakest in 16 months (52.9; consensus: 53.2) despite stronger readings in both Germany and France, spurring fears that the strength exhibited over 1Q16 was transitionary, with new orders pointing to further weakness; stay cautious towards EUR, with ECB likely to remain accommodative over the medium term. In UK, latest treasury forecasts revealed that the economy could contract 3.6% alongside 520,000 job losses versus the base case over 2 years if Brexit materializes, appearing overly pessimistic ahead of the June 23 referendum; stay neutral GBP over the near term.

¨   AxJ Markets: USDSGD edged 0.25% lower overnight after stronger April inflation data, with headline CPI printing -0.5% y-o-y (Mar: -1.0%) and core CPI printing 0.8% y-o-y (Mar: 0.6%), easing fears of a protracted deflationary environment. Growth momentum will be an important determinant in MAS’s October meeting, while recent hawkish Fed rhetoric should continue to pressure the SGD; stay mildly bearish SGD. Over in Thailand, 10y ThaiGB yields tightened c.8bps overnight, likely on a brief respite after surging c.30bps in the previous week following the strong 1Q16 GDP print. We remain mild underweight ThaiGBs on supply fears, although we remain positioned for another 25bps rate reduction to limit upward THB pressure and support the external sector.

¨   USDJPY fell -0.84% overnight amid subdued movements elsewhere, as investors unwounded short JPY bets after a weekend summit between G7 finance ministers failed to generate a consensus for stronger coordination against the surging yen. Strong April trade surplus, driven by import compression rather than improving exports, compounded on Japan’s woes despite aggressive BoJ easing; stay neutral JPY.