OECD Recommended Expansion of Fiscal Spending to Spur Growth; Heightening Fears Ahead of the Italy Constitutional Referendum

29 November 2016

Rates & FX Market Update

OECD Recommended Expansion of Fiscal Spending to Spur Growth; Heightening Fears Ahead of the Italy Constitutional Referendum

Highlights

¨   Global Markets: The current upward trend in USD and UST yields paused overnight, with yields declining 2-5bps and the DXY retracing 0.31%. OECD lent its support to Trump’s fiscal plans, predicting that his spending plans could bump US GDP growth by 0.4ppt and 0.8ppt to 2.3% and 3% respectively in 2017 and 2018. We think UST yields can climb to 2.50-2.65% by early-2017 before easing on limited political manoeuvrability and a more dovish than expected Fed; stay neutral UST. In contrast, OECD maintained its gloomy UK outlook, while opining that Germany can afford to expand its fiscal policies. 10y Bunds outperformed its peers overnight, as the Italy constitutional referendum looms amid chatters of further distress in the Italian banking system if PM Renzi loses; stay mild underweight peripheral EGBs. 10y OAT-Bund spread also climbed to a 2.5-year high, as conservative Mr Filon officially won the right’s Republican nomination, likely facing off against National Front’s Miss Le Pen in next year’s presidential election where markets are likely to be skeptical towards polling data; OATs could continue to see rising risk premium into 2017.

¨   AxJ Markets: Thailand October customs exports (-4.2% y-o-y; Sep: 3.4%) remained weighed by weak agriculture and industrial goods while customs imports continued to show signs of improvements (6.5% y-o-y; Sep: 5.6%). Weak export conditions compound on a possible softening in domestic consumption following the King’s passing, where we continue to opine for another BoT rate cut over the coming months to ease growth pressures; maintain mild underweight ThaiGB duration. Over in India, RBI attempted to curb the surging banking system liquidity by introducing a temporary incremental cash reserve ratio on deposits received between 16 Sep and 11 Nov. USDINR (+0.44%) and Gsec yields (+c.10bps) climbed overnight on the measure; stay neutral INR.

¨   USDJPY declined 0.8% overnight on a pullback in the USD. Following the better CPI data last week, a plethora of positive data signalled an improvement to 4Q16 consumption; both household spending and retail sales exceeded consensus estimates and September prints. The recent softening in the JPY could also offer BoJ short-term relief, providing an opportunity to hold policies over the coming months; stay neutral JPY.