Thursday, March 9, 2017

Strong ADP Bolstered Hawkish FOMC Expectations

9 March 2017


Rates & FX Market Update


Strong ADP Bolstered Hawkish FOMC Expectations

Highlights

¨   Global Markets: UST yields and the Dollar were bolstered by the extremely strong ADP print overnight (298k; consensus: 187k; Jan: revised +15k to 261k), with 10y yields approaching the 2.60% level once again. With FFR futures pricing in an almost-certain 25bps rate hike in March, investors have shifted their focus to the June FOMC meeting, with currently a c.50% probability of another rate hike being priced in; stay mildly bullish USD. The more optimistic outlook for the UK post-budget (2.0% growth this year; previous: 1.4%) and the lower expected borrowings failed to lift the GBP overnight (-0.27% against USD), although it stemmed deeper losses in the currency after dipping as low as 1.2139 intraday. Future deficits are expected to rise as UK slows down its pace of austerity, timing of tax collections, alongside potential liabilities arising from any extraordinary EU contributions; stay neutral Gilts.
¨   AxJ Markets: Chinese trade data came in unexpectedly weak, with exports declining 1.3% y-o-y (consensus: +14.0%), while imports materially surged by 38.1% y-o-y (consensus: +20.0%), although the data is certainly distorted by the Lunar New Year holidays. On a YTD basis, exports climbed 4.0% y-o-y while imports surged 26.4%, the latter driven by higher commodity prices and robust domestic demand; stay neutral CGBs over the near to medium term as PBoC maintain a broadly neutral policy stance.
¨   USDKRW was unchanged overnight, although the pair appeared volatile over the past few trading sessions amid renewed geopolitical frictions with North Korea and China, and ahead of the Constitutional Court’s impeachment decision due March 10 alongside the US FOMC meeting in the week ahead. We remain cautious towards the KRW over the medium term despite the country’s resilient external fundamentals, given the currency’s susceptibility to external gyrations; stay mildly bearish KRW.

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