US 3Q GDP Likely to Influence December FOMC Expectations, as the Fed Balance Between its Twin Mandate

24 October 2016

Rates & FX Market Weekly

US 3Q GDP Likely to Influence December FOMC Expectations, as the Fed Balance Between its Twin Mandate

Highlights

¨   Global Markets: The US economy is expected to expand at 2.5% annualized in 3Q, but inflation via core PCE is anticipated to slow down to 1.6% (2Q16: 1.8%), which may pose a dilemma for the Fed to raise interest rates; remain neutral USD and mild overweight UST. In the UK, 3Q GDP is expected to remain flat from the 2Q16 final print, given subdued post-referendum economic impact thus far. Nevertheless, we do not expect a strong print to have any outsized impact on sentiment, given medium-term risks to UK’s outlook in view of an uncertain exit negotiation process with the EU; GBP likely to remain under downward pressure over the coming months. In Europe, after QE tapering was dismissed by ECB, focus will shift towards economic data such as PMIs and German CPI; remain neutral EUR. Inflation is Japan is still expected to contract 0.5% y-o-y in September, far from BoJ’s 2% target underscoring our view for a 10bps rate cut at the end of year alongside the continuation of the APP; remain neutral JPY. Elsewhere, Australian 3Q16 CPI due is expected to reforge RBA policy expectations, especially after September’s arguably disappointing labour data. A softer-than-expected print is likely to exert downward pressure on ACGB yields and the AUD; remain neutral stance towards AUD.

¨   AxJ Markets: Investors turn to Chinese 6^th plenary session amid the quiet calendar in the week ahead, with focus on developing the socialist culture and ethics. We opine for USD to remain supported by expectations for FFR hike this year, pressuring the USDCNY pair higher over the near term; maintain mildly bearish CNY. Meanwhile, South Korean 3Q GDP is expected to moderate from its strong 2Q print, fueling the weak economic growth outlook. We expect another 12.5bps BoK rate cut in 4Q, limited by household debt woes, supporting our mild underweight stance on KTBs over the medium term while we opine for the KRW to be pressured weaker alongside CNY amid export competitiveness concerns, given high export volume to China. Over in Singapore, the fairly gradual uptick in CPI released in the week ahead is unlikely to douse MAS easing speculations, keeping SGD trading on a softer note over the medium term, despite high hurdle for MAS to act; expect SGS yields to take directional cues from USTs. Over in Thailand, weak customs trade may compound on economic growth concerns, underscoring BoT rate cut expectations; keep exposure on ThaiGBs to the short end of the curve nonetheless as high net supply alongside narrowing Fed-BoT policy rate differentials dulls the allure. With no economic data due in Malaysia, Indonesia and India, expect asset movements to track global markets in the week ahead, amid intense debates over the December FOMC decision that may exacerbate EMFX vulnerability.

   

Weekly Positioning

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