Strong ADP Sets the Stage for Solid NFP Expectations Later Today

2 June 2017

Rates & FX Market Update

Strong ADP Sets the Stage for Solid NFP Expectations Later Today

Highlights

¨   Global Markets: Better than expected ADP employment data (253k; consensus: 180k; Apr: 174k) alongside relatively healthy manufacturing PMI (52.7; flash: 52.5) and ISM manufacturing (54.9; Apr: 54.8) prints sent UST yields and the DXY index c.1bps and 0.28% higher overnight. Investors await the NFP print later tonight, with a strong print likely to affirm markets’ expectations for an additional 2 FFR hikes for the rest of 2017; we prefer to remain neutral towards the USD, with US political volatility to continue weighing on the reflation sentiment. While EURUSD dipped 0.26% overnight on the dollar’s retracement, core EGB yields were little changed, with manufacturing PMI prints across Europe remaining healthy (EU: 57.0; Apr: 56.7). Peripheral yields were mixed overnight, with 10y BTPs c.5bps higher as investors consider the possibility of an early Italian election this year, while 10y PGBs fell c.6bps and extending its strong momentum since March, as sentiment towards Portugal improved. We continue to remain constructive towards German Bunds, given the current tepid recovery alongside lingering potential tail risks (e.g. Greece).

¨   AxJ Markets: Caixin China manufacturing PMI unexpectedly dipped to 49.6 in May (consensus: 50.1), contrasting the improvement seen in the official reading, driven by softer output growth and muted increments in both domestic and overseas new orders. CNY and CNH extended their positive performance against the USD for the 4^th straight session, as officials tweaked their CNY fixing methodologies alongside the surge in O/N CNH rates; the USDCNY pair is likely to remain under 7 on average over the remainder of 2017. South Korea 1Q17 GDP was revised higher to 2.9% y-o-y (previous: 2.7%), reaffirming the strong external momentum in early-2017, although the pace may moderate over the coming months amid lingering external uncertainties. With inflation remaining within BoK’s mandate, we eye a neutral monetary policy stance over the rest of 2017; stay neutral KTBs.

¨   AUDUSD dipped 0.71% overnight, extending its decline from the previous day, despite the stronger April retail sales (1.0% m-o-m; consensus: 0.3%). Poor iron ore fundamentals and the miss in Caixin PMI likely weighed on AUD’s sentiment; a neutral AUD stance remains appropriate at current levels.

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