Thursday, 15 June 2017

P. 1

Rates: Markets ignore Fed

The Fed tried to sooth markets by holding on to the blueprint of its future tightening cycle, but bond markets largely ignored this message. US yields crashed after weaker inflation readings and couldn’t recover lost ground after the Fed meeting. US yield tested or broke below support levels. A confirmed break suggests a return to pre-Trump levels.

Currencies: EUR/USD cannot take out resistance with a little help of the Fed

EUR/USD tested key resistance after weak US inflation and retail sales, but made a U-turn following the FOMC meeting, completely erasing earlier gains. Bonds gave the FOMC decisions a cool reception, suggesting that the “FOMC” turnaround was largely technical-inspired and not driven by fundamental considerations.

Calendar

• In line with expectations, the Fed raised its target rate to 1-1.25%. The press

statement contained few surprises as the FOMC is still convinced inflation will rise. The rate projections in the dot plot stayed the same, bar the 2019 projection which was lowered marginally. The Fed also announced details of winding down its balance sheet, which will start ‘relatively soon’.

• US equities ended mixed, with Nasdaq underperforming (-0.41%). Overnight, Asian stocks slumped. Oil touched the lowest level since November, below $47/barrel, as US gasoline supplies unexpectedly rose for a second week.

• The Aussie dollar jumped above AUD/USD 0.76 after an encouraging jobs report. Employment again surged in May, led by a rebound in full-time positions, sending the jobless rate to the lowest level in more than four years.

• New Zealand’s dollar fell from near a four-month high after a report showed gross domestic product grew 0.5% Q/Q in Q1, less than the forecast of 0.7%. Y/Y growth printed at 2.5% compared to a consensus of 2.7%.

• The special counsel investigating Russia’s interference in the ’16 election is now expanding the scope of special counsel Mueller’s investigation from Trump’s associates to Trump himself, sources familiar with the inquiry reported.

• ECB Nowotny asked whether adopting an inflation range, rather than a specific target, would make more sense in a situation where price growth is low for a long time.

• The eco calendar today contains the Bank of England’s rate decision and UK retail sales. In the US, industrial production and initial jobless claims data will be released this afternoon. Spain and France tap the market.

Headlines

S&PEurostoxx 50NikkeiOilCRB

Gold2 yr US10 yr US

2yr DE10 yr DEEUR/USDUSD/JPYEUR/GBP

Thursday, 15 June 2017

P. 2

Softer US inflation and retail sales send bonds higher

Ahead of the FOMC decision, markets usually trade uneventful. Yesterday’s session was exceptional, due to the release of weak US eco data. For the third month in a row, inflation surprised on the downside and declined. Headline and core inflation are dropping further below the 2% target. (Core) PCE deflators, the Fed’s inflation targets, are structurally lower than CPI and will probably drop too. US Treasuries shot higher after the data, pushing yields below key support. The monetary policy sensitive belly of the curve outperformed.

FOMC sticks to rate path, but can’t convince markets

The FOMC was unmoved by yesterday’s weak data. Moderate growth will continue and an even tighter labour market should lead to higher inflation. The Fed therefore pencilled in a 2% forecast for headline and core PCE in 2018 and 2019, while they lowered the 2017 PCE inflation projection to 1.6% (from 1.9% in March). The central bank revised its unemployment rate prediction substantially lower, while keeping growth projections virtually unchanged. The Fed left its rate path unchanged for 2017 (one more rate hike) and 2018 (three rate hikes) and marginally lowered the 2019 projection to 3 rate hikes (from 3.5). The gap with market expectations remains as wide as ever, suggesting that they don’t believe that the Fed will be able to increase rates much. The US central bank also reiterated its intention to start winding down its balance sheet in 2017, another sign of confidence in the outlook. For a full review of the FOMC meeting and decisions, see our flash report). US Treasuries fell somewhat lower after the FOMC decisions, but still eked out juicy daily gains.

In a daily perspective, the US yield curve ended substantially lower and flatter with yields declining between 3.2 bps (2-yr) and 9.9 bps (30-yr). The German yield curve flattened with yield changes ranging from +0.8 bps (2-yr) to -5.3 bps (30-yr). Peripheral spread narrowing versus Germany continued with Portugal (-10 bps) and Spain/Italy (-4/5 bps) outperforming at the 10-yr tenor.

Well-filled US eco calendar

Eco data will stay very important for markets, especially after yesterday’s weak eco data and a contrastingly optimistic FOMC. US production is expected at 0.2% M/M in May, albeit after a strong 1% M/M in April. More attention will go to business sentiment data of NY and Philadelphia. The NY measure may be slightly higher, while there is scope for a drop in the Philly Fed index given recent very high, unsustainable (?), levels. Jobless claims and NAHB housing market sentiment may be close to unchanged, but at high levels. Overall, we don’t see much danger from stronger data for US Treasuries.

Rates

US yield -1d2 1,35 0,005 1,73 -0,0510 2,14 -0,0730 2,77 -0,09

DE yield -1d2 -0,69 0,025 -0,44 0,0110 0,24 -0,0230 1,06 -0,06

Weak US production, while mixed business sentiment data

Claims and NAHB housing sentiment strong, but as expected

US T-Note future (black) & S&P (orange): Sharp move higher bonds on weak data, modest return action after hawkish FOMC.

US 10-yr yield drops below key support at 2.15% (Trump gap). Second close today needed to confirm the break. Next support at 1.87%

Core bonds rally on weak US eco data

FOMC sticks to its rate path projection and will start tapering its balance sheet

Investors remain skeptical about the Fed’s intentions

Peripheral spread narrowing continues unabatedly

Thursday, 15 June 2017

P. 3

Spain and France tap market

The French Treasury sells two on the run OAT’s (0% Feb2020 & 0% May2022) and two off the run OAT’s (3% Apr2022 & 4.25% Oct2023) for a combined €7-8B. ASW spreads of bonds on offer tightened in the run-up to the auction while some bonds are slightly expensive on the French curve. We expect demand to return to historical averages, with French election risk out of the way. Additionally, France will try to raise €1-1.5B via inflation-linked bonds. The Spanish debt agency also issues two on the run and two off the run bonds: 5-yr Bono (0.4% Apr2022), 10-yr Obligacion (1.5% Apr2027) and off the run’s (5.75% Jul2032 & 4.2% Jan2037) for a total amount of €4-5B. ASW spreads also tightened in the run-up to the auction, but the off the run bonds are cheap on the Spanish curve. We expect a plain vanilla auction.

Markets ignore Fed

Overnight, most Asian stock markets trade lost some ground. Brent crude stabilized after yesterday’s sell-off and a flat US Note future also suggests a neutral opening for the Bund.

Today’s eco calendar contains several US eco data which we expect near or below consensus. The market reaction will be interesting. The Fed tried to sooth markets yesterday by holding on to the blueprint of its future tightening cycle, but bond markets largely ignored this. US yields crashed after weaker inflation readings and couldn’t recover lost ground after the Fed meeting. The US 10-yr (2.16%) and 30-yr (2.82%) yields closed below support levels, while the 5-yr yield extensively tested it (1.69%). If the breaks are confirmed today, a retracement of the post-Trump yield rise can be expected. It would suggest that markets take into account a different scenario than the Fed (recession given the extreme flattening of the curve?). For now, this isn’t our base scenario, but we no longer consider it unrealistic either. If support levels in yield terms hold by the end of the week, we recommend a cautious sell-on-upticks strategy.

R2 166,40 -1dR1 165,93BUND 165,3 0,30S1 161,68S2 160,17

German Bund (September contract!!): ECB holds off policy normalization. Heading for test of contract high?

US Note future (September contract!!!): US Treasuries gain on weak eco data and ignore rather hawkish Fed

Thursday, 15 June 2017

P. 4

EUR/USD: Failed test of 1.1300/66 resistance. Prefer to see EUR/USD

moving deeper in 1.08/1.13 range, but trigger is not available

USD/JPY: Downside not yet secured. Risks are equities and BOJ

(Friday)

Dollar rollercoaster ride on data and FOMC

The dollar made a rollercoaster ride yesterday. Weak US inflation and retail sales pushed the dollar lower across the board. EUR/USD shot higher from about 1.12 to about 1.13, while USD/JPY dropped from 110.30 to just below 109. The FOMC hiked rates as expected, left its rate path virtually early unchanged and announced that the start of the balance sheet run-off would be “relatively soon”. It couldn’t convince bond traders. Bonds only retraced very partially strong gains on the weak data. The dollar however made a full U-turn with EUR/USD back to 112 (close 1.1218). USD/JPY didn’t completely erase losses, closing at 109.58 from 110.07 on Tuesday. We think that technical arguments played a role in the full retracement of EUR/USD’s initial gains, as resistance could not be taken out (triggering profit taking).

Asian equities trade in negative territory overnight, but without sharp losses. Oil digests yesterday’s big inventory-related price drop. USD/JPY tested the downside early on, but reverted to opening levels soon (109.60). EUR/USD traded uneventful in Asia around 1.1220.

The US calendar is well filled today. US production is expected at 0.2% M/M in May, albeit after a strong 1% M/M in April. More attention will go to business sentiment data of NY and Philadelphia. The NY measure may be slightly higher, while there is scope for a drop in the Philly Fed index given recent very high, unsustainable (?), levels. Jobless claims and NAHB housing market sentiment may be close to unchanged, but at high levels. We don’t expect mixed data to give FX markets firm direction.

The dollar gained ground on the FOMC decision, even as US yields didn’t move much higher. EUR/USD approached key resistance at 1.1300/66, but the test failed, keeping our hypothesis that the upside of EUR/USD is capped alive. We don’t expect a sharp comeback of the dollar in the near term without distinctively better US growth and higher inflation readings. While markets decided to (largely) ignore the FOMC decision, we think they should at some point move in the Fed’s direction. Therefore we favour EUR/USD to move lower in the 1.08/1.13 range, but a trigger is currently unavailable. We remain cautious on the upside in USD/JPY ahead of Friday’s BOJ meeting. The pair might still go for a test of the 108.13 April low if equities correct lower. At least more signs of a bottoming out are needed to favour long USD/JPY longs.

Currencies

R2 1,1428 -1dR1 1,13EUR/USD 1,1214 0,0000S1 1,0839S2 1,0778

EUR/USD and USD/JPY make rollercoaster ride triggered by weak US data and the FOMC decisions

Thursday, 15 June 2017

P. 5

Technical picture

The USD/JPY rally ran into resistance in early May. A mini sell-off pushed the pair below the previous top (112.20), making the short-term picture negative and driving the pair further down in the 108.13/114.37 range. There is no convincing sign of a U-turn yet.

Early May, EUR/USD failed to break below the 1.0821/1.0778 support (gap). Poor US data and US political upheaval propelled EUR/USD north of the 1.1023 range top to a corrective top of 1.1323 early June. A higher low, higher high pattern developed, but the pair is digesting earlier gains and consolidates near the top. The Trump top/correction top at 1.1300/1.1366 is next strong resistance. USD sentiment will have be very negative to clear this hurdle. A return below 1.1023 would indicate that the upside momentum has eased.

Sterling likely to remain weak

The Bank of England reconvenes today to decide on its the policy rate and the direction of future policy decisions. Earlier this week, the May UK inflation rate rose more than expected, from 2.7% to 2.9%. Meanwhile, the labour market data came in lower than expected with weekly hourly earnings (excl. bonuses) rising only 1.7% compared to a consensus forecast of 2%. On balance, UK consumers are thus losing purchasing power. The combination of the latest sterling depreciation, the evidence of the pass through of sterling to CPI, the potentially weaker economic growth and lower wage inflation suggest that inflation might by higher in the short term and potentially lower in the longer term. This lowers the chance of UK inflation overshooting the BoE target in the longer run and therefore weakens the need for the BoE to hike rates. In addition, political uncertainty remains elevated. A moderately dovish adjustment to the language and guidance is possible and would buy some time until the August meeting when the new inflation projections are available. By then, the political situation could possibly have become clearer as well.

Sterling began and ended the day yesterday at around the same level compared to the dollar (around 1.2750 for cable) and to the euro (around 0.88 EUR/GBP).

From a technical point of view, EUR/GBP broke above the 0.8774 resistance and tested the 0.8854 area (2017 top) on Friday. A real break didn’t occur. A retest of that area is possible. A break beyond would open the way to the 0.90 area. A return below the 0.8655 correction low would be an indication that the pressure on sterling is easing.

R2 0,8881 -1dR1 0,8866EUR/GBP 0,8805 0,0007S1 0,8383S2 0,8314

EUR/GBP: first test of 2017 top rejected, but sterling remains in the defensive

GBP/USD: topside test rejected on UK election outcome, but USD rebound still unconvincing

Thursday, 15 June 2017

P. 6

Thursday, 15 June Consensus Previous US 14:30 Empire Manufacturing (Jun) 5.0 -1.0 14:30 Import Price Index MoM / YoY (May) -0.1%/2.9% 0.5%/4.1% 14:30 Initial Jobless Claims 241K- 245k 14:30 Continuing Claims 1920K 1917k 14:30 Philadelphia Fed Business Outlook (Jun) 24.9 38.8 15:15 Industrial Production MoM (May) 0.2% 1.0% 15:15 Capacity Utilization (May) 76.8% 76.7% 15:15 Manufacturing (SIC) Production (May) 0.1% 1.0% 16:00 NAHB Housing Market Index (Jun) 70 70 UK 10:30 Retail Sales Ex Auto Fuel MoM / YoY (May) -1%/1.9% 2.0%/4.5% 10:30 Retail Sales Inc Auto Fuel MoM / YoY (May) -0.8%/1.6% 2.3%/4.0% 13:00 Bank of England Bank Rate 0.250% 0.250% 13:00 BOE Asset Purchase Target (Jun) 435b 435b 13:00 BOE Corporate Bond Target (Jun) 10b 10b EMU 11:00 Trade Balance SA (Apr) 22B 23.1b France 08:45 CPI EU Harmonized MoM / YoY (May F) 0.0%/0.9% 0.0%/0.9% Italy 10:00 CPI EU Harmonized YoY (May F) 1.5% 1.5% Belgium 15:00 Trade Balance (Apr) -- -1464.9m Sweden 08:00 PES Unemployment Rate (May) -- 3.8% Switzerland 09:30 SNB Sight Deposit Interest Rate -0.75% -0.75% 09:30 SNB 3-Month Libor Lower Target Range -1.25% -1.25% 09:30 SNB 3-Month Libor Upper Target Range -0.25% -0.25% Events 10:30 Spain to Sell 0.4% 2022, 1.5% 2027, 5.75% 2032 & 4.2% 2037 Bonds 10:50 France to Sell 0% 2020, 0% 2022, 3% 2022 & 4.25% 2023 Bonds + I/L Bonds

Calendar

Thursday, 15 June 2017

P. 7

10-year td -1d 2-year td -1d Stocks td -1dUS 2,14 -0,07 US 1,35 0,00 DOW 21374,56 46,09DE 0,24 -0,02 DE -0,69 0,02 NASDAQ 6194,892 -25,48BE 0,57 -0,02 BE -0,55 0,00 NIKKEI 19831,82 -51,70UK 0,93 -0,11 UK 0,09 -0,05 DAX 12805,95 40,97

JP 0,06 -0,01 JP -0,12 -0,01 DJ euro-50 3547,15 -10,72

IRS EUR USD GBP EUR -1d -2d USD td -1d3y -0,10 1,64 0,50 Eonia -0,3580 0,00005y 0,13 1,82 0,65 Euribor-1 -0,3730 0,0000 Libor-1 1,1589 0,019610y 0,74 2,12 1,05 Euribor-3 -0,3310 0,0000 Libor-3 1,2456 0,0039

Euribor-6 -0,2710 -0,0010 Libor-6 1,4232 0,0014

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

EUR/USD 1,1214 0,0000 EUR/JPY 122,95 -0,47 CRB 173,02 -2,81USD/JPY 109,63 -0,43 EUR/GBP 0,8805 0,0007 Gold 1264,50 -7,10GBP/USD 1,2736 -0,0010 EUR/CHF 1,0891 0,0028 Brent 47,00 -1,26AUD/USD 0,7612 0,0062 EUR/SEK 9,7576 0,0138USD/CAD 1,3244 0,0023 EUR/NOK 9,4485 -0,0134

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 VIA OUR KBC RESEARCH APP (iPhone, iPad, Android) 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.

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