Global markets saw greater volatility in the month of Sep, driven by mixed remarks from Fed members. We think Fed members appear cautious before deciding to tighten policy further especially amid the soft inflation. On top of that, we reckon the Fed will avoid raising rates at

• Global markets saw greater volatility in the month of Sep, driven by mixed remarks from Fed members. We think Fed members appear cautious before deciding to tighten policy further especially amid the soft inflation. On top of that, we reckon the Fed will avoid raising rates at the Nov FOMC meeting, as it may cause greater uncertainties ahead of the US presidential election scheduled on 8 Nov. However, we reckon that there could still be one hike in 2016, probably in Dec - though US GDP growth is expected at a less-than-robust 2.0% whilst inflation is still below the FOMC target. According to the Fed’s economic projections in Sep, a majority (10 out of 17) of the members continued to see a 25bps hike in FFR in 2016.
• Still, it will be a testy Oct month for Treasuries, as we digest fresh economic data, Fed-speak which lately slanted towards the hawkish side, and prospects for higher crude oil price which could boost medium to longer term inflation levels. We maintain our 10T short term target (1-2 weeks) to 1.66%. We also maintain our 10T end-year 2016 target of 1.75%.
• There was a blip in the Ringgit bond market, amid lower oil prices coupled with risk-off sentiment ahead of the recent FOMC meeting. In our opinion, Ringgit govvies should see stronger support if crude oil prices are able to sustain near the $50 per barrel level in the coming weeks. Moreover, Ringgit bonds will also see demand heading to the Nov MPC meeting, because some economists are still anticipating a 25bps rate cut by Bank Negara this year. From the latest MPC statement, we reckon that the central bank is slightly dovish by anticipating softer inflation in the Sep MPC meeting, as it only highlighted the range of 2-3% in the previous meeting. In our opinion, the central bank’s accommodative stance was little changed in contrast to its Jul monetary policy statement. However, we reckon that there is still room for rate cut by end of this year amid the softer inflationary outlook.
• On the monetary policy side, we believe the BoT is less inclined for further easing, looking at the improvement in economic activities in recent months. Hence, it is likely to cap the upside for Thai bonds. Furthermore, we anticipate sustained pressure on the fiscal borrowing side. Recently, the government announced the 2017 fiscal budget. It plans to borrow a total Bt614 billion in the 2017 fiscal year (FY2017) starting Oct. Even though this is lower than the Bt638 billion planned for the current FY2016, there is also plans to refinance as much as Bt945 billion of debt in FY2017 – which brings us to a larger total of Bt1.56 trillion debt management plan for FY2017 (versus Bt937 billion as per announcement for FY2016 made last year).
• We expect the IDR government bond market to strengthen in Oct. Low inflation, successful tax amnesty program, stronger Rupiah and also anticipations of a sixth rate cut by BI should support the bond market. On the risk side, an interest rate increase by the Federal Reserve is a negative. As we kick off 4Q2016, we set our end-year target for the 10-year bond yield at 6.25% whilst we foresee the 7-day repo rate to fall to 4.75% by the end of 2016 amid falling inflation and weak economic growth (GDP growth is expected to grow 5.2% yoy in 3Q2016, the fastest since 4Q2013).