3 August 2017
Rates & FX Market Update
No Details of Plans to Issue Ultra-Long USTs
¨ Global Markets: 2y and 10y UST yields climbed c.2bps while the curve bear flattened overnight (30y: +c.1bps), after massive block-selling of Treasury futures, new IG supplies, and TBAC minutes recommending the Treasury to consider a broad increase in issuances across tenors as the Fed winds down its balance sheet. Notably, the minutes did not mention any details regarding ultra-long bonds, which contributed to the curve flattening. Fed’s Bullard cautioned against near-term rate hikes, while Fed’s Mester marginally dampened the implicit consensus among FOMC members that low unemployment rates will eventually feeds into inflation; the DXY fell 0.22% overnight. Fed’s Williams however, supports a reduction in the balance sheet as early as the September meeting, adding on that another 25bps rate hike this year appears appropriate depending on economic data; we prefer to maintain a neutral UST duration stance at this juncture. Over in Japan, services PMI dipped to 52.0 in July (Jun: 53.3) while overall composite reading weakened to 51.8 (Jun: 52.9), driven by softer new orders and potentially threatening its 5 consecutive quarter growth momentum. Amid still-weak inflationary pressures, we see little chance of BoJ reversing its long-held dovish views over the medium term, while markets will continue to test BoJ’s resolve in anchoring 10y yields near 0.1% in view of the rising yield environment globally; stay underweight JGBs, considering fat tail risks.
¨ AxJ Markets: July PMI numbers from Singapore were supportive of the island state’s economic momentum, as orders and output remained firm. Expect SGS to continue taking directional cues from USTs in the week ahead, while lingering pockets of weakness within the domestic sector should continue to warrant cautiousness in MAS’s policy decisions; stay neutral SGD.
¨ EURUSD continued its strong upward momentum overnight (+0.42%) amid light flows, supported by the mildly dovish Fedspeak with little key European data due. The pair is likely to test the 1.20 resistance over the coming sessions, although we caution against chasing the rally too far, given the ramifications of a stronger Euro on the bloc’s inflation and economy that could spur concerns within the ECB itself; stay neutral EUR.
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