Asia Rates: China NPC in focus

Higher open today
Group Research, Duncan Tan11 Oct 2022
    Photo credit: Unsplash Photo

    Large increases in Bund (10-15bps) and Gilt yields overnight would see Asia rates open higher today.

    CNY Rates - Onshore markets reopened yesterday after Golden Week holiday. NDIRS rates fell 4-6bps, likely on higher COVID case counts reported in recent days. 20th National Party Congress (NPC) starts on the 16th and will be keenly watched. Markets will be looking for possible signals of shift in COVID policy and prospects of reopening, which would have significant implications for the growth and interest rates outlook. If markets expect recovery momentum to accelerate post NPC, there could be a fairly large upward move in IRS rates as markets reprice for earlier normalization and convergence with global rates. NPC's impact on the outlook around CGB total returns would however be less clear-cut. If markets turn more optimistic on recovery pace and reopening timeline, we are likely to see a boost to foreign bond/equity inflows and greater conversion of export proceeds/fx deposits in 4Q, due to corporates/investors trying to front-run the actual recovery. This would be near-term bullish for CGBs. Beyond 4Q, however, BOP outlook could be weighed down by expectations of higher imports (leading to lower trade surplus) and resumption of outbound tourism.

    INR Rates - NDOIS rates jumped 10-15bps higher in early trading on Monday, largely a catch-up move to increases in US rates and oil prices during US hours on Friday. Post Sep MPC meeting, we think this hike cycle has more room to run and therefore, NDOIS rates need to be higher (at least 7.25%) for there to incorporate sufficient risk premium. That said, even if our 7.25% hurdle rate is hit soon, fast-rising oil prices in October are not conducive for a receive call, especially now that we don't have the anchor of GBI-EM inclusion expectations.

    KRW Rates - For BOK policy meeting tomorrow, our economist expects a 50bps hike and new forward guidance on terminal interest rate of around 3.50%. YoY headline inflation seems to have peaked and Jul/Aug/Sep prints surprised to the downside. There are also signs of slowing growth, especially on the exports front. However, it is probably too early to position for a BOK pivot as the central bank has signalled that it expects to stay in hiking mode until 1Q-end. Based on BOK's communications, for its hike cycle to end at a earlier time, we either need to see a Fed pivot or Korea inflation prints falling below 5% YoY. Spread between 91D CD rate and policy rate has widened to a massive 82bps, likely on higher CD issuances and seasonality effects (to cover year-end funding).

    Duncan Tan

    Rates Strategist - Asia

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