EC Slashed GDP and CPI Forecasts; RBA Delivered a Surprise 25bps Rate Cut on Tepid Inflation

4 May 2016

Rates & FX Market Update

EC Slashed GDP and CPI Forecasts; RBA Delivered a Surprise 25bps Rate Cut on Tepid Inflation

Highlights

¨   Global Markets: Fed officials (Lockhart & Williams) reiterated the live nature of the upcoming June meeting, although FFR futures remained reflective of market’s pessimism, pricing in a 12% probability of a 25bps hike in June. While the dollar recovered from its 1-year low, USTs brushed off the hawkish warnings as yields dipped 4-8bps overnight on slowdown fears; stay mild overweight USTs. Over in EU, the European Commission (EC) downgraded GDP growth (2016: 1.6%; previous: 1.7%) and inflation forecasts (2016: 0.2%; Feb: 0.5%), reinforcing the notion for ECB to remain accommodative and explore further monetary easing options over the medium term; stay mildly bearish EUR. In Australia, RBA surprised markets by delivering a 25bps rate cut (against our expectations for a 2H16 move), sending the AUD down 2.36% against the USD to 0.748 overnight; stay constructive on short-dated ACGBs, where we do not rule out further easing if conditions remain sub-optimal. The 2016/17 Australian budget appears to be mildly expansionary, as the nation seeks to balance economic growth and medium-term fiscal consolidation goals; expect higher net issuance (c.AUD72bn) with little impact to its AAA credit rating.

¨   AxJ Markets: China Caixin Manufacturing PMI printed 49.4 (consensus: 49.8) following a disappointing reading in the official gauge, highlighting its growth challenges in the face of excessive debt and overcapacity. We continue to opine for officials’ preference to maintain a reasonable level of growth (c.6.5%), underpinning PBoC’s inclination for another 50bps of rate cut in 2H16; stay mildly bearish CNY. Singapore’s PMI edged higher but remained in contraction (49.8; Mar: 49.4), although the currency is likely to fare well against its regional peers over the medium term despite lingering dovish MAS bets; stay neutral SGD.

¨   GBPUSD fell 0.89% overnight after manufacturing PMI surprised on the downside (49.2; consensus: 51.2), ending), and the worst in more than 3 years, weighed by slowing global demand and the upcoming referendum. While Brexit fears may have eased recently, the high impact nature of the decision is likely to keep GDP hedges in place over the next 2 months; stay neutral GBP over the near term.