FOMC and ECB Minutes May Offer Glimpse of Any September Policy Inclinations

15 August 2016

Rates & FX Market Weekly

FOMC and ECB Minutes May Offer Glimpse of Any September Policy Inclinations

Highlights

¨   Global Markets: In the US, markets look ahead a heavy data calendar, with FOMC Minutes from July meeting to be the most influential for any hints towards a rate hike this year alongside a string of Fed speeches. While employment has shown strength, the Fed can afford to remain patient and await for the right economic conditions following disappointing retail sales and PPI and ahead of the November election. As such, our base case remains a 0-1 rate hike for 2016 with bias for December rather than September; remain mild overweight USTs. Over in the UK, the spotlight will be on July’s labour and retail sales post referendum data, with any weakness likely to pressure the BoE and treasury to expand stimulus. The outcome of the 40y Gilt auction will also be interesting to eye, given the tight market supply at the super long end; stay constructive on Gilts. In Europe, ZEW surveys which disappointed last month post Brexit will be scrutinized while investors will watch ECB minutes on Thursday for indication of any spillover effects onto the Eurozone; remain mild overweight EGBs. In Japan, the GDP release on Monday will set the tone for the week with the 100 USDJPY resistance to remain in focus. Elsewhere, RBA minutes due should reveal greater clarity towards the bank’s forward-looking stance, given broad consensus of a lack of incremental dovish rhetoric in the last policy statement. Labour and wage data will also be closely scrutinised, with any weakness likely to exert downward pressure on ACGB yields; stay mild overweight ACGBs.

¨   AxJ Markets: Following the heavy economic calendar over the past week, keen attention is expected to remain on CGBs in the quiet week ahead, as yields continue to test new multi-year lows amid domestic demand for safer sovereign bonds stemming from corporate default concerns and tighter regulations from WMPs. Turning to Singapore, the soft retail sales and NODX prints may reinforce growth woes, fueling the lingering speculation for MAS to ease; expect the great Singapore Sale to have a marginal impact on retail sales amid weak consumer sentiment. Eye the USDSGD pair, which could retest the 1.34 support should the USD rally gain traction post FOMC minutes in the week ahead. Meanwhile, short dated KTB yields are likely to remain anchored, given the prospect of another rate cut this year alongside its relative attractiveness against global market bonds; opportunities to add the 3/10y KTB steepeners amid the tight and unsustainable spreads. On little planned economic releases in Malaysia, expect Malaysian assets to track global sentiment and oil prices in the week ahead, with the 2Q16 GDP print unlikely to offer BNM much relief; stay neutral MYR. Elsewhere, another quiet economic calendar in Thailand, where the spate of bombings on Friday could weigh on tourism spending over the coming months (c.20% contribution to GDP), prompting incrementally BoT dovish stance; maintain neutral stance on THB while keeping duration bias to mildly underweight. Elsewhere, Bank Indonesia reconvenes on August 19, where current conditions offer an excellent opportunity to deliver another pre-emptive 25bps rate cut, including: i) benign July inflation; ii) stable macroeconomic and financing conditions; and iii) boost in sentiment arising from the tax amnesty program and the relatively robust 2Q16 GDP print; we stay constructive on short-dated IndoGBs. In India, WPI is expected to tick significantly higher in July, although markets remain watchful for any announcements with regards to the appointment of the new RBI governor; stay neutral Gsecs.

   

Weekly Positioning

	Rates	FX
Overweight
Mild Overweight	UST, C.EGB, ACGB, Gilts
Neutral	SGS, HKGB, KTB, CGB, MGS, IndoGB, GolSec	USD, AUD, JPY, HKD, MYR, THB, IDR, INR
Mild Underweight	P.EGB	EUR, SGD, KRW, CNY, GBP
Underweight	JGB