10y Yields Approaching 2.50% on Positive Data and Higher Oil Prices

2 December 2016

Rates & FX Market Update

10y Yields Approaching 2.50% on Positive Data and Higher Oil Prices

Highlights

¨   Global Markets: Both Markit US PMI and ISM manufacturing printed better than consensus estimates, improving from October’s prints, driving UST yields higher overnight, with the 10y approaching the 2.50% level; higher oil prices post-OPEC agreement (Brent +6.9% overnight) also augmented the move on inflationary concerns. We stay cautious on USTs for the remainder of 2016, with investors likely to eye G3 central bank meetings over the month ahead of the quiet year-end holidays. Elsewhere, UK manufacturing PMI turned a touch softer from October, as factories faced soaring input costs due to the weaker GBP while demand lost momentum. However, GBPUSD climbed 0.68% overnight on the soft USD, as well as the Brexit minister comments that the government would consider contributions to the EU budget in return for market access; we remain mildly bearish GBP. In the EU, manufacturing PMI prints were generally strong across the bloc, although the aggregate print (53.7, unchanged from October) was weighed down by a mildly disappointing German print. EU unemployment rate fell to 9.8%, the lowest since July 2009, although unlikely to sway ECB’s accommodative stance at this juncture; stay mildly bearish EUR.

¨   AxJ Markets: After the recent curb in gold imports, PBoC stepped up restrictions to contain capital outflows by limiting the amount of outbound remittances, investments and RMB loans, which is likely to slow the pace of CNY depreciation over the medium term despite aggravating capital control fears over the coming weeks; expect USDCNY to reach 7 by end-2016. In Thailand, November inflation prints remained at subdued levels, underpinning the case for another BoT rate cut over the near term. The Thai’s crown prince decision to accept the invitation to succeed the late king could also eliminates some uncertainties over the near term.

¨   KRW gained c.0.1% against the USD overnight, remaining between the 1,160 to 1,180 range since the US election. Final 3Q GDP print was revised 0.1ppt downwards to 2.6%, weighed by the manufacturing sector which continues to exert a headwind to South Korea’s growth trajectory. Political paralysis is likely to persist till early-mid 2017, as opposition MPs remain divided over the impeachment process; stay mildly bearish KRW.