Soft ISM Services Dampened September FOMC Liftoff Expectations

7 September 2016

Rates & FX Market Update

Soft ISM Services Dampened September FOMC Liftoff Expectations

Highlights

¨   Global Markets: UST yields and the DXY slipped overnight after ISM services softened to 51.4 in August (consensus: 54.9; Jul: 55.5), which contrasted with Markit services PMI which indicated stable conditions; FFR futures indicate only about 24% probability of a hike in September (previous: 36%), and about even chance of a hike this year. While upcoming Fedspeak from regional presidents may marginally raise liftoff expectations, the likelihood of a September FFR hike is likely to remain low; stay mild overweight USTs. European yields followed USTs lower overnight, while EURUSD surged on the weaker dollars, as EU final 2Q16 GDP print delivered no surprises; stay mild overweight core EGBs vs peripherals as investors turn increasingly cognisant towards the bloc’s political developments, as Italy prepares to hold a constitution referendum in October. Over in Australia, RBA held rates at 1.50% as expected, while reiterating that inflation is expected to remain low over the foreseeable future. AUD took cues from global markets overnight, while ACGB yields were slightly higher on the rate decision; stay mild overweight ACGBs.

¨   AxJ Markets: Over in Singapore, MAS managing director commented that while the city state continues to face downside growth risks, recession remains an unlikely event, and that the current NEER policy stance remains appropriate. While we think the likelihood of a NEER re-centering in October has fallen, easing bets are likely to linger on, keeping the SGD trading on the softer side of the SGD NEER band through 2016. Elsewhere, Malaysian foreign reserves stabilised at USD97.5bn over the latter half of August, despite headwinds over the period on volatile energy prices. BNM is expected to deliver its bimonthly rate decision later today, where we expect a status quo decision after the surprise pre-emptive rate reduction in July; stay neutral MYR.

¨   USDJPY declined sharply overnight, trading at the 101 handle this morning post-services ISM. JPY remained disproportionally hurt by the softer dollars, weighing on Japanese corporate earnings and inflation outlook, pressuring BoJ for further easing despite years of aggressive QQE failing to reverse the deteriorating economic outlook; stay neutral JPY over the near term.