Thursday, May 25, 2017

Fed’s Gradual Balance Sheet Normalization Plan Well Received

25 May 2017

Rates & FX Market Update

Fed’s Gradual Balance Sheet Normalization Plan Well Received


¨      Global Markets: The key takeaways from FOMC May meeting minutes were the high likelihood of a June FFR hike, along with a very gradual approach in which Fed would be normalising the balance sheet which would indicates the feasibility for FOMC to continue raising the FFR concurrently, should the recent economic slowdown prove to be transitory. The proposed approach would require the Committee to announce a set of caps on the amount for bonds that would be allowed to run off, with a revision on the caps set every 3 months. Barring large revisions to inflation outlook, we recommend for investors to continue positioning for a flatter UST curve, with FOMC’s gradual approach well received by investors; keep a neutral view on USTs. 
¨   AxJ Markets: BoK’s decision to hold rates at 1.25% remains within consensus expectations, underpinned by the prospect of 2H17 fiscal stimulus alongside the constrain from elevated household debt burden. Muted movements were seen on KTBs, where investors continue to await President Moon’s plans for fiscal stimulus, and its corresponding plans to fund looser fiscal budgets, which may pressure the longer end of the KTB curve as the new administration deviates from the comparatively tight fiscal budgets seen during the Park administration; keep a neutral duration view on KTBs over the near term. Singapore’s 1Q final GDP climbed to 2.7% y-o-y (previous estimate: 2.5%), bolstered by strong manufacturing growth. Lingering uncertainties stemming from rising trade protectionism alongside the likelihood for monetary tightening in China continue to underpin MTI’s decision to keep its full year GDP forecast between 1.0-3.0%, which could signal the prospect for MAS to maintain its current accommodative SGD NEER framework in the upcoming October meeting. SGD appreciated by 0.34% to 1.3846/USD yesterday, where we expect further appreciation on SGD vs regional peers to remain limited over the medium term as investors position for a status quo MAS decision.
¨   With strong government fiscal spending alongside improving exports supporting the Thai economy, BoT held rates at 1.50% yesterday, sustaining monetary accommodation amid risks of rising protectionism. BoT governor also highlighted the risk of yield seeking behaviour as Fed continues to raise the FFR, which limits our appetite for THB despite the improving economic outlook; USDTHB inched lower to 34.342 (-0.26%) yesterday on the back of softer USD movements, where we prefer to maintain a neutral view on THB.

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