Mild Correction in US Core CPI Supported USTs Overnight, Although a December FFR Hike Remains Firmly on the Cards

19 October 2016

Rates & FX Market Update

Mild Correction in US Core CPI Supported USTs Overnight, Although a December FFR Hike Remains Firmly on the Cards

Highlights

¨   Global Markets: UST yields edged 2-3bps lower overnight after September CPI data disappointed; although headline CPI printed in line with consensus (1.5% y-o-y), core CPI softened to 2.2% y-o-y (consensus and Aug: 2.3%). FFR futures indicated that the 2016 hike probability dampened marginally to c.63% (previous: c.66%), as overall US macro and recent hawkish Fedspeak continues to underpin a December rate hike; stay mild overweight USTs. Over in the UK, September headline CPI accelerated to 1.0% y-o-y (Aug: 0.6%), with core CPI also higher at 1.5% y-o-y (Aug: 1.3%), although the ONS maintained that there is little evidence attributing the spike to the weaker GBP post-referendum currently. Reduced market expectations towards any aggressive BoE easing, alongside news that the UK parliament has the right to reject the final Brexit deal, sent GBPUSD 0.97% higher overnight; we remain comfortable with our mildly bearish GBP stance.

¨   AxJ Markets: Chinese credit data revealed little progress in ongoing deleveraging efforts, with the September TSF at CNY1.72trn (consensus: 1.39trn), although part of the acceleration can be attributed to seasonal factors; y-o-y growth rate inched marginally higher to 12.5% y-o-y. As China continues to face the tough decision between reforms and stable economic growth, we continue to expect further downward pressure on the CNY, with PBoC likely to remain tilted towards the dovish end; stay mildly bearish CNY. In India, MPC minutes under the new framework revealed that concerns over India’s economic growth and a pullback in CPI drove the 25bps rate cut decision, though members acknowledged that there remains upside risks to inflation. With headline inflation receding, there remain opportunities for further RBI easing over the coming months; stay mild overweight Gsecs.

¨   AUDUSD climbed 0.5% overnight to 0.7672 on mild USD retracement below the 98 DXY handle. RBA minutes due revealed policymakers’ doubts surrounding the labour and housing markets, but indicated little in terms of future policy trajectory. Governor Lowe estimated that current unemployment rate is c.0.5ppt above full employment, with labour market trends likely to be an increasingly key factor in future RBA rate decisions; stay neutral AUD.