Fed Erred on the Cautious Side on Slower Pace of Labour Improvement and EU Referendum Risk

16 June 2016

Rates & FX Market Update

Fed Erred on the Cautious Side on Slower Pace of Labour Improvement and EU Referendum Risk

Highlights

¨   Global Markets: Markets reacted decisively to the perceived dovish Fed, with UST yields and DXY declining 4-5bps and 0.33% overnight; 10y yields now below its 1.60% support. The statement indicated that the pace of improvement in the labour market has slowed (in contrast with the April statement), mainly on slower job gains as other labour indicators remained healthy, and also painted a more sanguine outlook of the US economy on stronger household spending and less drag from net exports. While both headline and core PCE inflation were revised higher to 1.4% and 1.7% respectively (Mar: 1.2%, 1.6%), the dot plot was downgraded While the median still suggests for 2 hikes this year, expectations were trimmed for 2017 and 2018 to 3 hikes each (Mar: 4 hikes), suggesting rising uneasiness among FOMC members; Fed’s George withdrawn her dissent for a 25bps hike. We remain biased towards a later rate hike, although uncertainties appear to be rising; stay mild overweight USTs. Over in UK, labour indicators broadly surprised on the upside, as unemployment ticked lower to 5.0% while wage growth stabilised at 2.0% y-o-y (consensus: 5.1%, 1.7% respectively), amid intensifying debates ahead of the EU referendum; stay neutral GBP.

¨   AxJ Markets: China’s new bank loans expanded in May to CNY986bn (Apr: CNY556bn), although aggregate financing delved deeper to CNY660bn (Apr: CNY751bn), as Chinese authorities remain supportive of growth while clamping down on riskier shadow borrowings, highlighting the challenges faced to deleverage the massive debt load. We remain of the view for another 50bps rate cut in 2H16; stay constructive on short-dated CGBs. Malaysia May CPI stabilised at 2.0% y-o-y (Apr: 2.1%), which remains manageable for BNM and provides for policy maneuverability in the event of a steeper economic slowdown; stay neutral MYR.

¨   IDR strengthened 0.28% overnight to 13,355/USD, with only marginal gains this morning post-FOMC. Trade balance due yesterday came in weaker than expectations, as exports remained sluggish while imports were better than expected. BI reconvenes later today, where we expect rates to remain unchanged, while reiterating their commitment to remain accommodative to support economic and credit growth; stay neutral IDR.