Friday, 03 February 2017

P. 1

Rates: Strong payrolls should weigh on US Treasuries

All eyes are on the US payrolls today. Consensus expects a strong net job creation of 180k with risks even on the upside of expectations. The unemployment rate will remain near cycle lows while earnings might also be higher than expected. This mix is unequivocally negative for US Treasuries.

Currencies: Payrolls to change fortunes in favour of the dollar?

Yesterday, the dollar was slightly in the defensive in the wake of a soft Fed statement and as risk sentiment remained cautious. Today, focus turns to the US payrolls. We see risks for an above consensus labour market report. If so, it might help to put a floor for the recent USD correction.

Calendar

• US stock markets traded choppy near opening levels ahead of today’s payrolls.

Overnight, Asian stock markets trade mixed as well with China slightly underperforming after a 5-day Lunar NY holiday.

• China's central bank surprised financial markets by raising short-term interest rates on the first day back from a long holiday, in a further sign that it is slowly moving to a tighter policy bias as the economy shows signs of steadying.

• Growth in China’s manufacturing sector slowed markedly at the start of the year as the flow of new business slowed despite a boost in export orders, according to the Caixin-Markit manufacturing PMI (decline from 51.9 to 51.0).

• Amazon disclosed a weaker-than-expected 22% rise in quarterly sales, along with a disappointing revenue outlook, sending the e-commerce heavyweight’s shares down in after-hours trading.

• US defence secretary Mattis warned Pyongyang that Washington would respond to the use of nuclear weapons with “effective and overwhelming” force, days after the White House launched a comprehensive review of North Korea policy.

• Japanese government bond yields and the yen have swung wildly in morning trade after the Bank of Japan bought more bonds than expected in its market operations.

• Romania faced some of the biggest anti-government demonstrations since the fall of communist leader Ceausescu. At least 200k people demonstrated against an emergency decreed that opponents say hinders the fight against corruption

• Today’s main events are US payrolls, non-manufacturing ISM and a speech by Fed governors Evans. The EMU (final) and UK services PMI’s will also be released.

.

Headlines

S&PEurostoxx 50NikkeiOilCRB

Gold2 yr US10 yr US

2yr DE10 yr DEEUR/USDUSD/JPYEUR/GBP

Friday, 03 February 2017

P. 2

Core bonds have a constructive session

Yesterday, global core bonds parted ways. German bonds caught up with US Treasuries’ post-FOMC rally and profited from surging gilts after the release of the BoE inflation report and the press conference by governor Carney. US Treasuries tried to rally too, but the attempt failed and the Note future ended flat. Equities and oil made some intraday moves, but ended nearly flat and didn’t affect core bonds. The inability of US Treasuries to hold on to intraday gains might have been due to positioning ahead of today’s payrolls. In a daily perspective, the German curve shifted 1.9 bps (2-yr) to 4.2 bps (5-yr) lower. The US yield curve steepened with yields changing between -0.8 bps (2-yr) to +1.3 bps (30-yr). On intra-EMU bond markets, Italian and Portuguese/Greek 10-yr yield spreads narrowed by 4 and 5 bps. Spanish and French 10-yr spreads underperformed with spreads flat on the day due to fresh supply.

US payrolls in focus

The consensus estimate for January payrolls is a net increase of 180K, up from a somewhat disappointing 156K in December. The 3- and 6-month averages stand at 165K and 188K. The unemployment rate is expected to have stabilized at 4.7%, 0.1%-point above the cycle low. Average hourly earnings are expected at a strong 0.3% M/M and 2.8% Y/Y. In December, it was even stronger at 0.4% M/M and 2.9% Y/Y, the cycle high. Looking at the available pointers, we see risks for a (much) stronger than expected payrolls growth. The ISM manufacturing employment index rose to 56.1 in January from 52.8 previously. The ADP employment report showed even an outsized 246K gain in private jobs, up from 151K in December. Initial claims in the survey week fell to a very low 237K in January versus 275K in the survey week for the December report (admittedly the holidays may have distorted these figures). Also other regional indicators showed strong employment figures. There are also reasons to believe the December payrolls were artificially low. The strong ADP employment suggest that a strong rebound is possible. Regarding the unemployment rate we side with the consensus. Regarding wages (AHE) we have no reasons to distance us from consensus, but are cautious as many states raised the minimum wage, sometimes quite substantially.

Rates

US yield -1d2 1,22 0,015 1,94 0,0210 2,49 0,0230 3,10 0,02

DE yield -1d2 -0,73 -0,025 -0,34 -0,0410 0,45 -0,0230 1,18 -0,02

Bund rallied in sympathy with gilts after a dovish BoE meeting

US Treasuries erased intraday gains ahead of payrolls

French and Spanish auctions were okay, but some underperformance nevertheless.

Bund future (black) and EuroStoxx (orange) (intraday): Constructive Bunds session helped by gilts. Equities’ more lacklustre session ended

little changed

S&P: Trump’s reflation rally lost power. Since mid-December, equities move in a tight range. Will payrolls be able to give new direction? .

Strong US payrolls report

Unemployment to stabilize at low level

Earnings to be strong too

Friday, 03 February 2017

P. 3

We expect strong payrolls: red alert for US Treasuries!

Overnight, Asian stock markets trade mixed with China slightly underperforming following the Lunar NY holidays and Japan somewhat outperforming as the yen is correcting lower. The US note future and oil prices have no bias, suggesting a neutral opening for the Bund.

Today’s main event is the US payrolls report. Consensus expects 180k net job growth, but we put risks on the upside of the expectations. Average hourly earnings could beat consensus as well while the unemployment rate will remain near the cycle low. This unequivocally strong report should be negative for US Treasuries and core bonds in general. We side with consensus for the non-manufacturing ISM (57.0) while Chicago Fed Evans (dovish voter) is a wildcard for trading. He is the first scheduled Fed-governor following this week’s FOMC meeting.

From a technical point of view, the Bund’s break below the neckline of a double top (162.62) is negative. We expect the Bund to go for a test of the bottom/cycle low. The US Note future trades in the 122-14+ - 125-09 sideways range. We expect also a move towards the lower bound of the range. We hold our negative views on both German Bund and US Note future on the back of accelerating growth and inflation. US investors still have to adapt to the Fed’s 2017 rate hike scenario (3 hikes) while European investors might face another “recalibration” of the ECB’s APP-programme in H2 2017.

R2 164,90 -1dR1 164,45BUND 162,19 0,30S1 160,72S2 159,91

German Bund: break below neckline double top paves way to range bottom?

US Note future: 125-09 resistance ‘unbreakable’. Heading towards December low after strong payrolls?

Friday, 03 February 2017

P. 4

EUR/USD: dollar to profit from a strong payrolls report.

USD/JPY test of the 112 support area again rejected. Payrolls to confirm bottoming out process?

Will payrolls change USD fortunes for the better?

Yesterday, there were few important eco data in the US and Europe. So, Wednesday evening’s relatively soft Fed statement and a cautious global market sentiment drove USD trading. Both elements were slightly negative for the dollar. EUR/USD set a new ST correction top north of 1.08, but finished the session off the intraday highs at 1.0759. USD/JPY tested the recent low of 112.08, but a break didn’t occur as investors await today’s key US payrolls report.

Overnight, Asian markets show a mixed picture as Chinese investors return from the Lunar New Year holidays. Most Asian equities trade mixed. Japan outperformance as USD/JPY rebounds of yesterday’s low. The BOJ caused some intraday volatility with the execution of its bond buying programme. Japanese yields end the yen jumped temporary higher, but this was countered by a successful fixed rate unlimited buying operation of 5-to10 year government bonds. The yen finally weakened further. USD/JPY trades currently just north of the 113 big figure. At the same time, the dollar is slightly better bid compared to yesterday. EUR/USD trades in the 1.0755 area.

Today, the US payrolls will be the key feature for USD trading. The market expects 180K net January payrolls growth. The unemployment rate is expected unchanged at 4.7%. Average hourly earnings are expected at a strong 0.3% M/M and 2.8% Y/Y. In December, it was even stronger at 0.4% M/M and 2.9% Y/Y, the cycle high. Based on other recent data evidence (ISM, ADP , claims) and technical factors, we see risks for stronger than expected payrolls growth. Regarding the unemployment rate, we side with the consensus. Regarding wages (AHE) we have no reasons to distance us from consensus, but are cautious as many states raised the minimum wage, sometimes quite substantially. Earlier this week, the dollar rebounded intraday after the strong ADP report/manufacturing ISM. So, despite rising uncertainty on the impact of Trump’s policy, strong key US data might support the dollar as they could finally push the Fed to take a next step in its normalisation process. We see a decent chance that today’s payrolls might be USD supportive. If so, the dollar might drift further away from the key support of USD/JPY 112.06/08 and the EUR/USD 1.0874 resistance. Trump-driven (USD) uncertainty might temporary move a bit to the background.

Currencies

R2 1,1145 -1dR1 1,0874EUR/USD 1,0756 -0,0027S1 1,0341S2 1,0000

Dollar decline slows as Asian investors look forward to key US payrolls report

Upside risks for payrolls

The dollar might profit, despite rising uncertainty about Trump’s policy

The dollar was slightly in the defensive yesterday

A soft Fed statement and cautious risk-off sentiment weighed

Friday, 03 February 2017

P. 5

Global context. The USD rally due to the Trump reflation trade petered out of late. Even more, Trump politics/communication is becoming a sources of global uncertainty that weighs on the dollar, at least temporary. EUR/USD broke a minor resistance at 1.0775. Next resistance is coming in at 1.0874. The day-to-day USD momentum has become more fragile. A return above EUR/USD 1.0874 would question the short-term USD positive outlook. At some point, the absolute interest rate support should provide a USD floor. We wait for technical signals that the USD correction has run its course. Today’s payrolls, if strong, might provide such a signal. USD/JPY is trading well off the post-Trump highs (118.60/66). The recent rebound off the lows (112.08) wasn’t convincing. USD/JPY 111.16 (38% retracement of the 99.02/118.66 rally) is the next key support.

Sterling developing a topping out process?

Yesterday, EUR/GBP drifted higher going into the BoE’s policy announcement. The BoE left its policy rate unchanged and didn’t expand the APP. The BoE acknowledged the ongoing resilience of the UK economy and raised its growth forecasts. At the same time, the BoE basically maintained its inflation forecast. Some members indicated that the inflation overshoot is coming a little closer to its limits. Even so, the BoE still sees substantial risks from the Brexit process. An early rate hike isn’t on the cards. This absence of potential additional interest rate support in the near to medium term hammered sterling. EUR/GBP jumped temporary back above the 0.86 barrier, but closed the session at 0.8588. Cable lost well over 1 big figure and closed the session at 1.2527.

Today, the UK services PMI is expected to ease slightly from 56.2 to 55.8. We don’t have as strong reason to take a different view from the consensus. Of late, UK eco data showed decent resilience. That said, after yesterday’s soft BoE assessment on inflation, sterling might again become a bit more sensitive to negative eco news or turbulence from the Brexit process. Of course, later in the session, the overall USD swings in the dollar will also affect the sterling cross rates. After yesterday’s rebound, EUR/GBP 0.8450 support looks again a bit better protected. We look for confirmation that a bottoming process is coming in place. The price action in cable at least suggests that further sterling gains against the dollar won’t be easy.

R2 0,9047 -1dR1 0,8881EUR/GBP 0,8594 0,0080S1 0,8450S2 0,8304

EUR/GBP: 0.8450 support better protected after soft BoE policy assessment

GBP/USD topside test rejected?

Friday, 03 February 2017

P. 6

Friday, 3 February Consensus Previous US 14:30 Change in Nonfarm Payrolls (Jan) 180k 156k 14:30 Change in Private Payrolls (Jan) 168k 144k 14:30 Change in Manufact. Payrolls (Jan) 5k 17k 14:30 Unemployment Rate (Jan) 4.7% 4.7% 14:30 Average Hourly Earnings MoM / YoY (Jan) 0.3%/2.7% 0.4%/2.9% 14:30 Average Weekly Hours All Employees (Jan) 34.3 34.3 14:30 Labor Force Participation Rate (Jan) -- 62.7% .15:45 Markit services PMI (Jan) fi,nal 55.1 16:00 ISM Non-Manf. Composite (Jan) 57.0 56.6 16:00 Factory Orders (Dec) 1.0% -2.4% 16:00 Fazctory Orders (Dec F) 0.5%-- -2.4% Japan 01:30 Nikkei Japan PMI Services (Jan) A: 51.9 52.3 01:30 Nikkei Japan PMI Composite (Jan) A: 52.3 52.8 China 02:45 Caixin China PMI Mfg (Jan) A: 51.0 51.9 UK 10:30 Markit/CIPS UK Services PMI (Jan) 55.9 56.2 10:30 Markit/CIPS UK Composite PMI (Jan) -- 56.7 EMU 10:00 Markit Eurozone Services PMI (Jan F) 53.6 53.6 10:00 Markit Eurozone Composite PMI (Jan F) 54.3 54.3 11:00 Retail Sales MoM / YoY (Dec) 0.3%/-- -0.4%/-2.3% Germany 09:55 Markit Germany Services PMI (Jan F) 53.2 53.2 09:55 Markit/BME Germany Composite PMI (Jan F) 54.7 54.7 France 09:50 Markit France Services PMI (Jan F) 53.9 53.9 09:50 Markit France Composite PMI (Jan F) 53.8 53.8 Italy 09:45 Markit/ADACI Italy Services PMI (Jan) 52.6 52.3 09:45 Markit/ADACI Italy Composite PMI (Jan) 53 52.9 11:00 CPI EU Harmonized MoM / YoY (Jan P) -1.8%/0.8% 0.4%/0.5% Spain 09:15 Markit Spain Services PMI (Jan) 54.7- 55.0 09:15 Markit Spain Composite PMI (Jan) 55.1 55.5 Sweden 08:30 Swedbank/Silf PMI Services (Jan) 59 59.9 09:30 Industrial Production MoM / NSA YoY (Dec) 0.5%/2.7%-- 1.2%/0.1% Events 00:50 BOJ Minutes of Dec 19-20 meeting 13:45 ECB Constancio speaks in Brussels 15:15 Fed's Evans Speaks on Economy and Policy in Olympia Fields

Calendar

Friday, 03 February 2017

P. 7

10-year td -1d 2-year td -1d Stocks td -1dUS 2,49 0,02 US 1,22 0,01 DOW 19884,91 -6,03DE 0,45 -0,02 DE -0,73 -0,02 NASDAQ 5636,197 -6,45BE 0,97 -0,04 BE -0,50 -0,05 NIKKEI 18918,2 3,62UK 1,38 -0,07 UK 0,12 -0,03 DAX 11627,95 -31,55

JP 0,10 -0,01 JP -0,22 -0,01 DJ euro-50 3253,61 -5,31

IRS EUR USD GBP EUR -1d -2d USD td -1d3y -0,05 1,72 0,79 Eonia -0,3510 -0,00405y 0,18 2,01 1,00 Euribor-1 -0,3730 -0,0010 Libor-1 0,7800 0,000610y 0,81 2,40 1,42 Euribor-3 -0,3280 0,0000 Libor-3 1,0346 0,0000

Euribor-6 -0,2440 0,0000 Libor-6 1,3504 0,0031

Currencies td -1d Currencies td -1d Commodities td -1d

EUR/USD 1,0756 -0,0027 EUR/JPY 121,68 0,08 CRB 193,52 -0,82USD/JPY 113,12 0,36 EUR/GBP 0,8594 0,0080 Gold 1214,80 -1,30GBP/USD 1,2516 -0,0150 EUR/CHF 1,0686 -0,0006 Brent 56,80 0,26AUD/USD 0,7653 0,0017 EUR/SEK 9,4226 0,0044USD/CAD 1,3033 0,0014 EUR/NOK 8,8788 0,0208

Brussels Research (KBC) Global Sales Force Piet Lammens +32 2 417 59 41 Brussels Peter Wuyts +32 2 417 32 35 Corporate Desk +32 2 417 45 82 Mathias van der Jeugt +32 2 417 51 94 Institutional Desk +32 2 417 46 25 Dublin Research France +32 2 417 32 65 Austin Hughes +353 1 664 6889 London +44 207 256 4848 Shawn Britton +353 1 664 6892 Singapore +65 533 34 10 Prague Research (CSOB) Jan Cermak +420 2 6135 3578 Prague +420 2 6135 3535 Jan Bures +420 2 6135 3574 Petr Baca +420 2 6135 3570 Bratislava Research (CSOB) Marek Gabris +421 2 5966 8809 Bratislava +421 2 5966 8820 Budapest Research David Nemeth +36 1 328 9989 Budapest +36 1 328 99 85

ALL OUR REPORTS ARE AVAILABLE ON WWW.KBCCORPORATES.COM/RESEARCH This non exhaustive information is based on short term forecasts for expected developments

This non-exhaustive information is based on short-term forecasts for expected developments on the financial markets. KBC Bank cannot guarantee that these forecasts will materialize and cannot be held liable in any way for direct or consequential loss arising from any use of this document or its content. The document is not intended as personalized investment advice and does not constitute a recommendation to buy, sell or hold investments described herein. Although information has been obtained from and is based upon sources KBC believes to be reliable, KBC does not guarantee the accuracy of this information, which may be incomplete or condensed. All opinions and estimates constitute a KBC judgment as of the data of the report and are subject to change without notice.

Contacts