Hawkish Fedspeak to Re-align Investors’ FOMC Expectations

                       

20 May 2016

 

 

Rates & FX Market Update

 

 

Hawkish Fedspeak to Re-align Investors’ FOMC Expectations

 

Highlights

 

¨   Global Markets: Fed’s Dudley, whose views are often in line with chairperson Yellen, reiterated the live possibility of a summer rate hike if the economy remains on recovery track, adding to recent strings of perceived hawkish Fedspeak. UST yields fell c.1bps overnight on lingering economic concerns, with 2/30y flattening to new multi-year lows; stay constructive towards USTs. ECB minutes delivered no surprises, with the bank likely to monitor developments over the coming months before deciding the next course of action. EURUSD fell 0.19% overnight on the stronger USD; stay mildly bearish EUR. Over in Australia, employment slowed down from the previous year’s surge (10.8k; consensus: 12k), while unemployment fell to 5.7% on a decline in participation rate. The softening labour market outlook continues to support RBA’s dovish inclination; stay mild overweight ACGBs.

¨   AxJ Markets: BNM MPC held the OPR steady at 3.25%, in line with consensus and our expectations, while maintaining a relatively balanced tone in the press conference post meeting. Economic growth is expected to improve on robust domestic demand, while inflation remains likely to trend lower over 2016. Watch Malaysia CPI due later today, with a softer print likely to open room for monetary easing as the real OPR remains positive, although lingering global risks may push BNM towards the cautious side; stay neutral MYR. Over in Indonesia, BI kept monetary policy unchanged as expected ahead of the August monetary framework recalibration. The bank revised the GDP projection lower to 5.0-5.4% (previous: 5.2-5.6%), and affirmed the stabilising inflation within the target band of 3-5%; monetary policy transmission has improved as the banking system adopted lower rates. However, the currency remains vulnerable to shifts in sentiment as the USDIDR pair approaches 13,600/USD; stay neutral IDR.

¨   The GBPUSD pair stabilised above 1.46 overnight supported by receding Brexit concerns. April’s retail sales exceeded expectations, despite initial worries of negative spillovers as the EU referendum draws near. We maintain our neutral stance towards GBP, as the eventual conclusion of the referendum remains unpredictable at this stage, with both outcomes likely to drive the GBP in different directions.