CIMB THB Monthly Fixed Income Commentary for January 2015

Good afternoon,

Attached is the monthly market commentary for January 2015. We have included some near term market outlook for the month of February 2015.

Synopsis

• There was little support for bonds after BoT held the policy rate unchanged at 2.00%, whilst there was mild reaction to the FOMC statement where Fed policymakers revealed little in their policy direction. On the other hand, bonds received a boost from ECB’s QE announcement and subsequent expectation of ample global liquidity.

Outlook

• The next MPC meeting comes on 11 March 2015. In the meantime, we expect speculation to continue with regards to the central bank’s policy direction. As a result, we think bond players will continue to scrutinize incoming macro indicators. And the latest inflation number has spurred talk of a BoT rate cut pretty soon this year. Latest inflation data showed prices fell as the CPI contracted 0.41% yoy in January against earlier consensus of 0.30% (+0.60% in December) whilst mom comparison showed a contraction of 0.59% in January against consensus of +0.20% mom (-0.50% mom in December). Bank of Thailand had moved to target headline inflation as a gauge for its policy direction starting this year as opposed to targeting core inflation previously. In January, core inflation was above consensus, showing rise of 1.64% yoy in January against 1.59% consensus (+1.69% in December).
• However, before players jump the gun to bid strongly along the government bond market, BoT assistant governor Mathee Supapongse has come out in the press to say the central banks sees the price decline only in the short term (likely to last into the second quarter of the year). He added the central bank, as a result, has not considered another monetary policy adjustment pretty soon. The assistant governor mentioned this even as he said actual inflation could be lower than the central bank's forecast of 1.2% this year.
• We advise players to be cautious buyers in February. We expect early to mid-month to see speculative buying including from offshore players, but later ahead of the March MPC we expect profit taking pressure to come in. Even though we can expect BoT to loosen monetary policy sometime this year, timing may not be too soon as policymakers may want to monitor macro data for a prolonged period before pulling the trigger on interest rates. Our stance remains the same. We think there is room for the central bank to lower rates if needed –  if fiscal stimulus is delayed and the risk of stagnation rises, BoT will be compelled to ease rates from the current 2.00% - and not anytime sooner. Short term range for the 10-year govvies is a wide 2.45-2.67%.