Article / 17 August 2016 at 3:39 GMT

Morning Report APAC: Hints of early Fed action on rates

APAC Sales Trading Desk / Saxo Capital Markets

  • NY Fed chief says Fed may raise interest rates as soon as September
  • UK CPI up as input and import costs jump
  • Renewed pressure on Bank of Japan, USDJPY slides

Economic data of the day (Singapore Time; GMT+8)



  • 0200 USD – US Fed releases minutes from July 26-27 FOMC meeting

Overnight news

US:  NY Fed President William Dudley said that the Fed could potentially raise interest rates as soon as next month:

  • We’re edging closer towards the point in time where it will be appropriate, I think, to raise interest rates further.
  • The market is "complacent" about the need for rate hikes.
  • "We are looking for growth in the second half of the year that will be stronger than the first half,” Dudley said. That should be enough to support sturdy job gains and keep the Fed’s outlook intact.

Atlanta Federal Reserve Bank President Dennis Lockhart said the economy is likely strong enough for at least one interest rate increase before the end of 2016:

  • He is not locked into a particular date for the decision. Lockhart highlighted a risk he and other Fed officials have given increased attention of late -- the lag in business investment.
  • He said a rebound in investment is "pivotal" to the ongoing strength of the recovery. Lockhart said his staff has been polling businesses and "heard little that would suggest a near-term reversal of the weak trend.
  • Early indications of third-quarter GDP growth suggest a rebound. I don't believe momentum has stalled. I remain confident about prospects in the second half of 2016 and 2017.

CPI unchanged MoM at 0.0% as expected. A 4.7% plunge in gasoline costs and a 0.2% dip in grocery items offset higher prices for shelter and medical care.

Overall prices rose just 0.8% YoY, a sharp slowing from the 1.4% YoY increase in January. Core prices rose 2.2% YoY (Mkt est: 2.3%) from 2.3% in June.

The food-at-home category sank 1.6% YoY, the largest annual fall in more than six years. Medical-care services increased 0.5% MoM and jumped 4.1% YoY, while prescription drug prices increased 0.9% in July.

New car prices edged up 0.2% and shelter costs increased 0.2% MoM, a slower increase than for the two prior months but a 3.3% jump YoY.

UK: CPI accelerated to 0.6% against expectations of 0.5%

Input costs surged an annual 4.3% last month, ending 32 consecutive declines, while import prices jumped the most since 2011.

Transport costs were the main boost to the inflation rate in July, with gasoline and second-hand cars having the largest impact.

The cost of imported materials as a whole -- which includes metals, parts and chemicals -- rose an annual 6.5% in July, while imported food materials jumped 10.2%.

Foreign exchange



 Very strong USD selling started London session and continued all night, only partly stopped by Dudley’s comments saying the Fed could raise rates as soon as next month.

The pressure is on BOJ with USDJPY briefly breaking the 100 level and finishing a formation of a head and shoulder which started on June 24th. A close below 100 will be significant to reach the next target of 95. Vice Finance Minister Masatsugu Asakawa expressed concern over the FX markets, but a verbal intervention can’t stop this move.

The large drop of the GBP since the Brexit vote has actually helped inflation accelerate faster which was shown in the data yesterday, triggering some buying interest in the pair which closed above the important level of 1.3000. We have not broken the year-low during the past few days. The first resistance level where we should find some sellers is at 1.3050/1.3070.

Even after Dudley’s comments, hedge funds are buying EURUSD and seem caught short. We broke the 100d MA at 1.1229, which will now serve as a short-term support level with a target of 1.1400 on the topside.

The uptrend channel in AUDUSD that started on July 15th is still in place and we are trading at the bottom of that channel. The top of the trend is at 0.7825.

In Emerging Markets, the USD selling was there but not as pronounced as the past few days, considering the fact that EM currencies were the main beneficiaries of the search for yields and will be the first getting hit if the Fed actually decides to raise rates.,

Foreign exchange volatilities


The market is caught short in USDJPY gamma and Vol pushing the curve higher. Banks are buying ATM and downside in basically the whole curve.

The vol curve in EURUSD is slightly higher but we don’t see any significant flow. The vols in EURUSD are too low in our view, considering the break in spot and would be worth it to buy to target more squeeze in the short positioning.


Noble Group was downgraded to B2 (five steps below investment grade) by Moody’s. That compares with the BB+ rating by Fitch, which is one notch under investment level.

Fitch said on Monday Noble will probably generate $900 million in coming months, including from a rights issue. The fund-raising was supported by shareholders, including China’s sovereign wealth fund.

Noble Group’s 2020 notes fell for a second day, losing 1.7 cents to 77.3 cents on the dollar for a yield of 15.5% as of 5:20 p.m. in Hong Kong, according to Bloomberg-compiled prices.

The Singapore-listed shares, which fell to the lowest since 2003 this month before the rights shares began trading, closed 2.8% higher.
US 10-year treasury yields rose from 1.52% to 1.59%, while the 2-year yield rose from 0.70% to 0.75% as investors interpreted commentary from a handful of Fed officials. Fed moderate Lockhart offered few clues on a rate rise timing, but dove Dudley said it’s getting closer to pulling the trigger.
Market pricing of the Fed funds rate rose, implying about a 20% chance of a rate hike in September, a 60% chance by December and 100% by Aug 2017.
Investor demand is holding strong on Australia’s 10-year bonds as yields after accounting for inflation are higher than in the US and compare with negative levels in Europe and Japan.





US stocks retreated from the previous session’s record highs on hawkish Fed comments, sharp gains in oil futures, a weakening dollar and consumer price data that shows US inflation remains tepid.
Losses in telecoms (-2.1%), utilities (-1.2%) and healthcare (-0.9%) led a fairly broad decline, while energy (+0.2%) closed alone in positive territory.
Apple slipped 0.1% lower after regulatory filings showed Warren Buffett’s Berkshire Hathaway loaded up on its shares. Others, such as George Soros’s hedge fund Soros Asset Management and David Einhorn’s Greenlight Capital, reduced their stakes.
Praxair surged +2.8% amid merger talks with Linde AG (+11.1%) in a deal that would combine companies each worth about $30 billion and create the world’s largest industrial gas supplier.
Schindler Holding slumped 4.4% after it cut the top end of its FY revenue growth outlook amid increasing uncertainty in the Chinese construction market and the recession in Brazil.
Asia Pacific Stocks

Hong Kong
Analyst Ratings
-      Sinopharm (1099 HK): Cut to neutral at Haitong Intl
-      Sunny Optical (2382 HK): Cut to sell at China Securities; cut to hold at CIMB
-      TCL Multimedia (1070 HK): Cut to neutral at CCB Intl

-      Developers: China bans property agents from giving loans
-      Vanke(2202) to buy assets or equity from counterparty
-      GCL-Poly(3800) expects 1H net profit to be at least RMB1.3bn
-      WH Group(288)’s subsid Smithfield 2Q net income +32% YoY to $137.8mn
-      Bank of Jinzhou(416) 1H net profit +165% YoY to RMB3.8bn
-      China eastern(670) carried 9.1mn passenger in Jul, +5.5% YoY
-      Wanda Commercial(3699) says applied for Sep 20 delisting of H-share
-      MGM(2282) MGM resort increased stake in MGM China by 188mn shares
-      CRGas(1193) interim net profit +25.7% YoY to $2bn
-      Intime(1833) interim net profit -21.3% YoY to RMB561mn
-      PAX Gobal(327) CFO and Joint Company Secretary Chris Lee to resign from all positions
-      VP(806) interim net profit -98.9% YoY to $5mn
-      ZTE(763) 1H16 global smartphone shipment at 28mn units, with full-year shipment target at 60mn units
-      Towngas(1083) interim net profit -11.7% to $564mn
-      Citic Telecom(1883) interim net profit +3.2% YoY to HK$410mn
-      MMG(1208) 1H loss after tax $93m vs $48m loss yr ago
Analyst Ratings:
-      JFE Holdings (5411 JP): Raised to hold at Jefferies
-      Nissan (7201 JP): Cut to neutral at JPMorgan
-      Nippon Steel (5401 JP): Upgraded to buy at Jefferies
-      Nissha Printing (7915 JP): Raised to buy at Mitsubishi UFJ Morgan Stanley
-      Sumitomo Heavy (6302 JP): Raised to buy at Nomura
-      USS (4732 JP): Downgraded to neutral at Mitsubishi UFJ Morgan Stanley
Analyst Ratings
-      InvoCare (IVC AU) cut to underweight vs neutral at JPMorgan
-      Mayne Pharma (MYX AU) cut to neutral vs buy at UBS
-      Stockland (SGP AU) cut to neutral from outperform at Credit Suisse

-      Fletcher Building (FBU NZ) full-yr net before items rises 5%
-      NZX (NZX NZ) 1H earnings down 8% on litigation costs
-      Nuplex (NPX NZ) full-year net profit up 19%
-      QBE (QBE AU) 1H earnings
-      CSL (CSL AU) full-year earnings
-      Primary Health (PRY AU) full-year earnings
-      Vicinity Centres (VCX AU) full-year earnings
-      Stockland (SGP AU) full-year earnings
-      Aveo Group (AOG AU) full-year earnings
-      Dexus (DXS AU) full-year earnings
-      Evolution Mining (EVN AU) full-year earnings
-      Sonic Healthcare (SHL AU) full-year earnings
-      ARB Corp (ARB AU) full-year earnings
-      Crown Resorts (CWN AU) full-year earnings

Source: CIMB / Bloomberg


US Fed closes in on raising rates, with a 100% possibility in 2017 priced in. Photo: iStock

– Edited by John Hampshire

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