Friday, August 5, 2016

US Treasuries have strengthened on the back of status quo decision by policymakers, Brexit

Attached is the monthly market commentary for Jul 2016. We have included the near term outlook for the month of Aug 2016.
  • US Treasuries have strengthened on the back of status quo decision by policymakers, Brexit and soft 2Q2016 GDP release. However, we are careful to consider that expectations of a rate hike this year remains intact, supported by improvements in the US labor market, consumer sentiment and the housing sector. Based on FFR futures trading at end-Jul, there was a higher probability of a rate hike at the Sep (at 18.0%), Nov (19.4%) and Dec (31.5%) FOMC meetings, in contrast to just 9.2% for a rate hike in Dec priced by futures trading at end-Jun. While the Fed is expected to keep its tightening path in a gradual pace, we think there should be a one-time hike this year. Meantime, we also reckon that safe-haven demand for UST will slowly subside as we progress towards end-2016, which will likely see yields showing upticks later this year.
  • Market was caught by surprise as Bank Negara slashed the OPR by 25bps. The market had priced in a rate cut, but was not anticipating the cut coming as early as the Jul MPC meeting. On top of that, the central bank lowered its 2016 CPI forecast to a range of 2.0-3.0%, from 2.5-3.5% made at the release of its latest Annual Report. We think policymakers still have room for further rate cuts this year, if risk to growth heightens. Meanwhile, the spread of 140bps between OPR and inflation was the widest in over a year. We now see OPR ending the year at 2.75%.
  • If we are led by BoT’s press release post the 3 Aug MPC meeting, we reckon that Bank of Thailand turned slightly dovish, as it highlighted increased downside risks amid global uncertainties, whilst seeing inflation at risk to be slower-than-expected this year, dragged by weak oil prices. However, we do not expect BoT to rush for easing (although it has room to ease), as macroeconomic data releases remained decent and showed some signs of improvements. Apart from that, we think that Thai govvies should see support after the correction in the second half of Jul, particularly for the shorter dated papers, due to a lack of supply for the month of Aug.
  • Inflation is projected at 2.90% YoY in Aug assuming zero monthly inflation. Inflation pressure should be much lower after the fasting month, and start of the new school year. On top of that, GDP growth is expected at 5.2% YoY in 3Q2016, the fastest since 4Q2013. Meantime, tax amnesty could bring in about $40 billion worth of funds from offshore if successfully conducted. We see economic growth to be stronger due to lower interest rates, whilst credit growth in 2016 is expected about 10% and GDP by 5.2%. Higher inflation, weaker Rupiah and higher crude oil price should reduce government budget deficit according to sensitivity analysis run by the ministry of finance. Aside, 7-day repo rate is anticipated to fall to 5.0% by the end of 2016 due to falling inflation and weak economic growth. Moreover, bond market is likely to remain well supported by foreign fund inflows, in anticipation of falling long-term inflation outlook and improving trade balance. Hence, we expect the bond market to strengthen in Aug. Low inflation, tax amnesty approval and also anticipations of the fifth rate cut by BI would support bond market. On the flipside, weak tax collection due to slow economic growth could be negative to government bond market. 10-year bond yield forecast for end of year is 6.25%.

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