CNY Rates - The reaction of IRS rates to yesterday's May trade data was telling. Though both exports and imports reported YoY declines which continue to point to soft external and domestic demand, IRS rates rose a couple of bps. While market confidence on the recovery remains low (inferring from the extent of retracement of recovery trades from January peaks), most players are reluctant to receive at the low level of IRS rates (5Y close to 2.50%) where a lot of bearishness on the outlook is already priced in. And so, IRS rates are facing resistance to break lower, despite the lack of clear improvement in the data and continued news reporting of more chinese banks cutting deposit rates. We think most players are waiting for a small bounce in IRS rates, possibly on announcement of new support measures, to go receive again at better levels. For the 5Y, we think significant receiving interest will come in above 2.60%. Therefore, we see 5Y IRS rate in a 2.45-2.65% range, with bearish pricing capping downside below 2.45% and markets' receiving interest capping upside room above 2.65%.
We expect today's May CPI release to print 0.3% YoY and survey expects May PPI to stay in deflation at -4.3% YoY. With low inflation providing some room for easing, market expectations for possible cuts to OMO/MLF rates or RRR to support growth are likely to persist. Our forecast sees a 10bps cut to 1Y LPR both in June and in 3Q, while implies likely cuts to 1Y MLF as well.
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