Strong ADP Jobs Report Weighing on USTs Ahead of Friday’s NFP

1 September 2016

Rates & FX Market Update

Strong ADP Jobs Report Weighing on USTs Ahead of Friday’s NFP

Highlights

¨   Global Markets: UST strength eased following the ADP print, which indicated strong jobs creation, fueling expectations for NFP to print favourably and adding to the case for a 2016 FFR hike. USD outperformed, most notably against JPY, driving the USDJPY pair higher to 103.37, but fail to test the 103.80 resistance meaningfully without any outright affirmation from Fed and BoJ. Meanwhile, marked underperformance in SPGBs were underscored by heightening political concerns ahead of the second Parliamentary vote on Friday, where failure to garner a simple majority would give PM Rajoy just 2 months to attempt to form a government before triggering another election. EU CPI estimates remained soft (Aug: 0.2%; Jul: 0.2%), suggesting room for further ECB easing to fuel the weak economic recovery; maintain mildly bearish EUR over the medium term.

¨   AxJ Markets: South Korea released a strong set of economic data, with the surprise upside on exports (Aug: 2.6%; Jul: -10.3%) and IP (Aug: 1.6%; Jul: 0.8%) supporting KRW strength despite strengthening USD alongside a modest climb in KTBs yields. However, with the easing inflationary pressures (Aug: 0.4%; Jul: 0.7%), another 12.5bps BoK rate cut remains a strong likelihood in 4Q as growth outlook remains challenging amid structural reforms and weak external demand; maintain neutral view on KTB duration. Elsewhere, the disappointing Thai trade data remained marginal on the THB, with the USDTHB remaining sticky at the 34.63 handle; although heavy gross issuance of ThaiGBs skewed to the longer maturities is likely to continue to spur a steepening ThaiGB curve, exacerbated by rising yields in the global markets, short to belly yields are expected to remain anchored by expectations for another 25bps BoT rate cut in 4Q; maintain neutral view on ThaiGB duration.

¨   In spite of the strengthening USD movements overnight, the GBPUSD pair remained relatively resilient, holding above the 1.306 support over the past week following UK’s Cabinet decision to not hold another Parliament vote before triggering Article 50. We eye Manufacturing PMI data today, where another weak print will further weigh on the GBP, exacerbated by the Fed-BoE policy rate divergence; maintain mildly bearish GBP.