Friday, March 10, 2017

No Immediate Signals for ECB to do more over the Near Term

10 March 2017


Rates & FX Market Update


No Immediate Signals for ECB to do more over the Near Term

Highlights

¨   Global Markets: While the initial claims print was marginally higher at 243k (consensus: 238k; previous: 223k), 10y UST yields climbed c.5bps and broke the 2.60% handle ahead of the NFP print later today, with expectations buoyed by the strong ADP print. 10y yields closing above the 2.60% level ahead of the weekend may push yields to test the key resistance level of 2.65% in the week ahead, when the FOMC is widely expected to lift rates by 25bps; stay neutral USTs. ECB took baby steps towards ending its QE policies eventually, shifting its forward guidance to neutral grounds and communicating that the bank “no longer sees a sense of urgency to take further easing measures”. EUR surged 0.35% against the USD overnight, while EGB yields widened c.4-6bps, as ECB’s rhetoric proved more hawkish than market expectations. We continue to prefer German Bunds against OATs and Peripheral EGBs, and hold the view that the ECB retains the flexibility to move in either direction, given rising political uncertainties and a potentially transient climb in inflation, the latter supported by recent softening in oil prices.
¨   AxJ Markets: China CPI unexpectedly softened to 0.8% y-o-y (consensus: 1.7%; Jan: 2.5%) on lower food prices, although PPI continued to tick higher (7.8% y-o-y; Jan: 6.9%) on higher commodity and input prices. Meanwhile, new RMB loans are a touch higher than expectations (CNY1.17trn; consensus: CNY0.95trn), although credit creation broadly declined from January prints on seasonal effects. We continue to expect government authorities to focus on curbing rising leverages and a broadly neutral monetary condition; stay neutral CGBs, while maintaining our mildly bearish CNY view.
¨   USDINR was almost unchanged overnight amid relatively subdued movements in global markets. Preliminary exit polls for Uttar Pradesh state elections, the most populous and politically sensitive state, have the BJP-led group as frontrunners, easing concerns surrounding the future of PM Modi. While the government will continue to face tough resistance towards implementing its reform plans and visions, we continue to eye a slow yet steady pace of improvement, with India’s robust foreign reserves to cushion mild external shocks; stay neutral INR.

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