FOMC Statement Broadly Unchanged from September, With a December Rate Hike Remaining Firmly on the Cards

3 November 2016

Rates & FX Market Update

FOMC Statement Broadly Unchanged from September, With a December Rate Hike Remaining Firmly on the Cards

Highlights

¨   Global Markets: The FOMC left the FFR unchanged overnight as expected with 2 dissents (Sep: 3), while continuing to build the case towards a December rate hike, although the final decision remains data and event-dependent as the US election approaches. The committee appeared more hawkish on inflation, acknowledging that prices have “increased somewhat” this year, while no longer expecting inflation “to remain low in the near term”. The FOMC also judged the case for a FFR hike “has continued to strengthen”, with FFR futures indicated a c.80% probability of a December hike, despite ADP missing expectations (147k; consensus: 165k); remain mild overweight UST as the Fed struggles to hike aggressively into 2017, eyeing the 1.90% level for opportunities to add long exposure. Over in the EU, improving German unemployment rate (6.0%; Sep: 6.1%) alongside firm manufacturing PMI prints across the bloc, with the exception of Italy, pushed the EURUSD pair near 1.11 amid continued dollar softness; stay neutral EUR, although the shared currency could come under pressure ahead of the Italy referendum.

¨   AxJ Markets: Singapore Nikkei PMI fell to 50.5 in October (Sep: 52.9) as the pace of output and new order expansion slowed. Despite 6 continuous months of expansion, hiring remains cautious as growth in business activities remain subdued amid sluggish economic conditions. Anaemic economic conditions into 2017 are likely to exert some pressure on MAS to ease; stay mildly bearish SGD. Elsewhere, S&P affirmed India’s BBB- rating with stable outlook, but ruled out an upgrade over the next 2 years in view of the country’s weak fiscal fundamentals and low GDP per capita, despite progress made in other areas; we maintain our mild overweight stance towards Gsecs, with upside risks to India’s credit rating outweighing downside risks at this juncture.

¨   USDKRW climbed 0.84% overnight amid risk-off sentiment associated with the US election, alongside rising domestic political uncertainty due to the recent scandal surrounding President Park. A dwindling in support for President Park, even within her own party, is likely to delay policy implementation and deepening her “lame duck” status till the 2018 elections. We remain comfortable in our mildly bearish call towards KRW.