Italy’s Planned 50-Year Bond Issuance Weighed on Supply; Thai, Indonesia CPI Remained Subdued

4 October 2016

Rates & FX Market Update

Italy’s Planned 50-Year Bond Issuance Weighed on Supply; Thai, Indonesia CPI Remained Subdued

Highlights

¨   Global Markets: While both Markit manufacturing PMI and ISM manufacturing remained in expansionary territory (Sep: 51.5), the underlying components continue to suggest a challenging environment as pace of new orders slowed, with some blaming the November Presidential Election as a source of potential uncertainty. FFR futures suggested a c.60% probability of a 25bps rate hike in 2016, although the probability for November’s meeting dipped amid the uncertain election outlook; stay neutral USD. Over in Europe, manufacturing PMI improved over the August prints, with the EU aggregate printing 52.6 (Flash: 52.6; Aug: 51.7), driven by gains in Germany. Long EGB yields were broadly higher overnight, after Italy confirmed plans to issue its first 50-year bond to capitalise on the low-yielding environment and ECB’s QE policies, and also concerns towards the banking sector; remain overweight core versus peripheral EGBs. Elsewhere, 3Q Tankan survey underwhelmed expectations among large corporates, as aggressive BoJ easing measures have failed to spark a virtuous cycle of higher wages and spendings. The focus will be on the 10y auction today, as BoJ hinted to maintain 10y yields near the 0% level in its quest to control the curve; stay underweight JGBs.

¨   AxJ Markets: Thai September CPI prints were underwhelming; despite a modest uptick in headline inflation to 0.38% y-o-y (Aug: 0.29%), core CPI dipped slightly to 0.75% y-o-y (Aug: 0.79%). The subdued inflationary environment is likely to keep BoT on the dovish side, where we continue to call for another 25bps rate cut this year to ease households’ and corporates’ debt burden. In Indonesia, Sep CPI climbed modestly to 3.07% y-o-y (Aug: 2.79%) as favourable base effects fade off, although the print is likely to stay in the lower half of BI’s 3-5% target range by end-2016, allowing for further BI rate cuts as necessary.

¨   GBPUSD continued its downward descend, declining 0.75% overnight to new recent lows at c.1.285 despite a strong Sep manufacturing PMI (55.4; consensus: 52.1). GBP was weighed by PM May’s announcement to formally trigger Article 50 in 1Q17, and to prioritise immigration flows rather than the country’s access to the EU single market. GBP is likely to remain under pressure as medium-term uncertainties over UK’s future looms.