FW: RHB FIC Rates & FX Market Weekly - 26/2/18

 

 

 

26 February 2018

 

 

Rates & FX Market Weekly

 

 

New Fed Chairperson Powell to Testify before Congress

 

Highlights

 

Global Markets

¨   A busy week ahead in the US as the new Fed Chair Jerome Powell testifies before the Congress delivering his first semi-annual monetary policy reports and discussing the economic outlook. Market participants will gauge if he leans towards an increasingly priced in additional fourth rate hike for 2018 and scrutinise any comments on recent market volatility in the wake of higher rate fears. On the economic data front, January core PCE will be closely watched given the upside surprises on wages and CPI, as well as Personal income and spending, ISM manufacturing, durable goods orders and the second reading for 4Q17 GDP growth; we remain mildly bearish USD as political and fiscal risks persist despite a positive growth outlook.

¨   In Europe, inflation data will be scrutinised, unemployment rate, consumer confidence, and French economic growth data are also due. However politics are likely to drive European markets as Angela Merkel’s CDU holds a convention to vote on coalition deal, and the result of the SPD vote on the coalition deal will be known on Sunday March 4^th, the same day Italians return to the polls. The BTP/Bund 10y spread has recently only marginally widened (still tighter than at the beginning of the year, and compared to previous widening rebounds) indicating that Italian political risk is minimal as (i) a hung parliament is the likely result and (ii) none of the three majors parties, including the anti-establishment 5Stars Movement, advocate for an exit of the EU; remain mildly bullish EUR.  In the UK, Manufacturing and construction PMI are due but the country will await the Brexit withdrawal text published by EU negotiators; we remain neutral GBP at this juncture.

¨   In Japan, retails sales, IP and capital spending are due and should not derail the ongoing positive economic momentum. The USDJPY pair shaped a pullback on the previous range resistance at 108.20 and should this level holds, a further drop is likely towards 104.15 in the coming weeks. Over in Australia, while investors will keep an eye out for credit and PMI prints, the highlight of the week is likely to be the private capex data due 1^st March, an indicator closely linked to investment trends in the country. The measures are expected to expand 1.0% q-o-q over 4Q17, although the bigger concerns for RBA are inflation and wage growth. Nevertheless, a strong print should buoy AUD’s strength, even as RBA normalisation remains likely to be delayed; stay neutral AUD.

 

AxJ Markets

¨   Chinese PMI prints will be the focus in the week ahead, with broad expectations remaining of the view for gradual expansion of economic activities for both manufacturing and services. In any case, the prints are unlikely to indicate an economic turning point, further complicated by any inadequate seasonal adjustments given the Lunar New Year; stay neutral CNY.

¨   Moving over to Singapore, January Industrial Production is expected to rebound strongly in y-o-y terms (7.8%; Dec: -3.9%), with a strong print likely to build hawkish expectations ahead of the April MAS meeting. While the pro-growth 2018 budget may offer MAS greater confidence to tighten, it may also indicate lingering worries among officials, and we remain of the view that an April tightening is not a given; stay neutral SGD. In Thailand, January trade data due is likely to affirm a robust external outlook, while inflation data due is unlikely to be supportive of a BoT rate hike over the near horizon. The central bank remains focused on both local and global factors, and signalled no immediate needs to track global tightening trends; stay mild underweight ThaiGB duration.

¨   In Malaysia, January inflation is expected to soften (consensus: 2.8% y-o-y; Dec: 3.5%), although unlikely to alter BNM’s rhetoric after the pre-emptive OPR hike in January. Inflation is also expected to broadly pick up over the remainder of 2018 on a broadening growth momentum; stay neutral MGS at this juncture. Lastly, Indonesia February CPI due is likely to stay near the lower band of BI’s 3-5% target range, with the central bank unlikely to be too concerned over price pressures at this stage. Expect the central bank to closely monitor global and exchange rate developments going forward; stay neutral IDR.

  

Weekly Positioning

 

	Rates	FX
Overweight
Mild Overweight		MYR
Neutral	UST, GILT, Core EGBs, ACGB, SGS, CGB, MGS, IndoGB	USD, GBP, EUR, AUD, JPY, THB, SGD, IDR, CNY
Mild Underweight	ThaiGB
Underweight	JGB