Healthy US Data Remains Supportive of a December FFR Hike

30 November 2016

Rates & FX Market Update

Healthy US Data Remains Supportive of a December FFR Hike

Highlights

¨   Global Markets: UST yields rose to session highs after revised 3Q16 GDP data revealed healthy growth trends, while consumption outlook remained sanguine as consumer confidence edged towards pre-GFC highs, reinforcing expectations for Fed to tighten further in 2017. However, yields ended 1-2bps lower overnight on month-end flows and renewed concerns over the OPEC deal due later today; stay neutral USTs. Over in the EU, German November’s CPI was marginally disappointing at 0.1% m-o-m (Oct: 0.2%), although German-Peripheral spreads tightened overnight after a source revealed that the ECB is willing to increase purchases of BTPs in the event PM Renzi loses the referendum, which appears to be the base case as suggested by recent polls. We continue to prefer German Bunds over Peripherals, and stay mildly bearish towards the EUR, on mounting political uncertainties across the bloc. In Japan, IP contracted 1.3% y-o-y although in line with consensus expectations. The weaker JPY and slight upticks in external demand could bode well for production and 4Q16 GDP growth; stay neutral JPY.

¨   AxJ Markets: While USDCNY fixings have stabilised on USD consolidation, tightening liquidity has exerted upward pressure on CGB yields, with 10y approaching the 3% mark. The low likelihood of PBoC easing over the near term amid firmer economic conditions could continue to drive yields higher, though counterbalanced by rising local debt risks; stay neutral CGBs. Elsewhere, South Korea IP contracted 1.6% y-o-y in October, weighed by Samsung and Hyundai woes. Meanwhile, President Park’s offer to resign before her term ends may offer a respite to the current uncertainties and paralysis in policymaking, although a snap election is unlikely before March 2017 in our opinion; stay mild underweight KTBs and mildly bearish KRW.

¨   USDIDR climbed 0.21% overnight to 13,560, from c.13,100 prior to the US election, a level deemed “undervalued” by a senior BI official. While we concur with BI’s view that there are further room for rate cuts, Fed tightening may invite higher scrutiny on interest rate differentials across the EM space. However, subdued inflationary trends and a more robust FX reserve should minimise any downsides over the near term; stay neutral IDR.