Markets Repricing Towards a “Live” March FOMC Meeting

2 March 2017

Rates & FX Market Update

Markets Repricing Towards a “Live” March FOMC Meeting

Highlights

¨   Global Markets: Despite the plethora of economic data due, market movements were mainly driven by President Trump’s speech and hawkish Fedspeak. Despite the lack of details within Trump’s speech to Congress, the apparent lack of the usual aggressive tone alongside the unwavering commitment towards tax reforms and infrastructure spending, supported the persistent climb on UST yields this week. Meanwhile, Fed’s Brainard departed from her usual dovish rhetoric, voicing her support towards a gradual liftoff cycle, fuelling further expectations of a March rate hike; FFR futures indicate a 80% likelihood of a March rate hike, compared to 52% in end-February; stay mildly bullish USD. German Bunds underperformed peers overnight after inflation spiked to 2.2% y-o-y in February (consensus: 2.1%; Jan: 1.9%), although we expect Bunds to remain supported over the near term in view of the looming Dutch and French elections. EU manufacturing PMI came in robust at 55.4, lending support to a gradually recovering European outlook over 2017.

¨   AxJ Markets: Both official and Caixin Chinese PMI revealed activity expansion in the month of February despite PBoC tightening measures. China watchers now look ahead towards the 12^th NPC, where new economic targets are likely to be marginally softer relative to 2016, given the emergent need to manage rising inflationary and credit pressures; eye a steeper CGB curve over 2017. USDKRW logged a 1.24% climb overnight as the US Fed signalled a possible March rate hike, while the KTB markets were closed overnight due to a public holiday. Meanwhile, IP and PMI due this morning remained weak, where we continue to pen in a 12.5bps BoK rate cut over the near term to support the economy; stay mild underweight KTB duration.

¨   USDIDR was little changed overnight despite volatile movements in global markets. Indonesian CPI continued to tick higher in February to 3.83% y-o-y (Jan: 3.49%; consensus: 3.90%), while core CPI jumped 0.06ppt higher as well, attributing to higher raw food and utility costs. Amid external uncertainties, rising US rates and rapid upticks in CPI, we think the likelihood of further BI easing may have rapidly diminished, with the central bank likely to maintain a conducive and stable IDR environment; stay neutral IDR.

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