Friday, 14 July 2017

P. 1

Rates: US inflation data key with Fed comments in mind

US inflation data will probably be determining for today’s trading session. Recent warnings by several Fed governors suggest that a downward surprise could spook markets and question the Fed’s tightening intentions. In that case, US Treasuries could profit, outperforming Bunds.

Currencies: Key US data to decide on next directional USD move

The dollar shifted in wait-and-see modus after recent Fed comments on inflation. Today’s US data, including CPI and retail sales, might decide on the fate of the US dollar. Strong data are needed for markets to give further credence to the pace of Fed policy normalization and to prevent further USD losses.

Calendar

• US stock markets eked out small gains (+0.1%-+0.2%) in an uneventful US

trading session. Overnight, Asian stock markets trade mixed with Japan outperforming (+0.5%) and China underperforming (-0.2%).

• Britain has for the first time explicitly acknowledged it has financial obligations to the EU after Brexit, a move that is likely to avert a full-scale clash over the exit bill in talks next week.

• Fed chair Yellen has given the strongest signal yet that regulators are planning to relax a contentious financial safety standard for big banks (eSLR) that executives have complained could perversely encourage them to take more risk.

• Fed Governor Brainard said she's "most focused on getting inflation back up around our 2% target." Dallas Fed Kaplan also said he needs to see inflation moving toward the central bank's goal as he assesses further rate hikes.

• Fitch maintained its A+ rating on China with a stable outlook, citing the strength of the country's external finances and macroeconomic record. ST growth prospects remain favourable, and economic policies have been effective in responding to an array of domestic and external pressures in the past year.

• Republicans launched their latest attempt to secure a longed victory on US healthcare by dropping a planned tax rollback for the wealthy. The new bill already drew criticism from senators on both sides of the political divide.

• Today’s eco calendar heats up in the US with CPI inflation, retail sales, industrial production and Michigan consumer confidence. JP Morgan, Citigroup and Wells Fargo publish Q2 earnings.

Headlines

S&PEurostoxx 50NikkeiOilCRB

Gold2 yr US10 yr US

2yr DE10 yr DEEUR/USDUSD/JPYEUR/GBP

Friday, 14 July 2017

P. 2

WSJ suggests Draghi will signal end QE in Jackson Hole

This week’s rebound on global core bond markets initially persisted yesterday. Amid an empty eco calendar, investors wondered about Yellen’s testimony before US Congress. Her subtle shift on inflation stressed the potential importance for markets from today’s US CPI (and retail sales) data. Around European noon, core bond markets made a U-turn after the WSJ reported that ECB-president Draghi will address the Fed’s Jackson Hole meeting at the end of August. According to officials, he is expected to signal that the ECB will announce at its September 7 meeting that they intend to gradually wind down QE-purchases next year. His appearance would be of symbolic value. His last speech in Jackson Hole dates back to August 2014 and was widely seen as heralding the start of asset purchases. The ECB confirmed Draghi’s attendance some hours after the rumours.

At the end of the session, the German yield curve increased by 0.7 bps (2-yr) to 2.4 bps (10-yr). Changes on the US yield curve ranged between +1.7 bps (5-yr) and +3.3 bps (30-yr). On intra-EMU bond markets, 10-yr yield spreads ended close to unchanged with Spain (+4 bps), Italy (+5 bps) and Portugal (+7 bps) underperforming after the WSJ’s Draghi article (end of QE ahead?!).

US eco calendar heats up

Today’s eco calendar heats up in the US with inflation data (June), retail sales (June), industrial production (June) and Michigan consumer confidence (July). Several Fed governors recently (eg Fed Brainard, Kaplan and to a lesser extent Yellen this week) warned that the US inflation path is key for their determination in continuing the tightening cycle. US CPI already slowed for three consecutive months now (2.7% Y/Y in February to 1.9% Y/Y in May) and consensus expects a further cooling to 1.7% Y/Y in June. Core inflation is forecast to stabilize at 1.7% Y/Y (compared to 2.3% Y/Y in January). US retail sales and industrial production are expected to advance by respectively 0.1% M/M and 0.3% M/M. Michigan consumer confidence is expected to stabilize near multi-year highs (95).

Rates

US yield -1d2 1,36 0,025 1,89 0,0210 2,34 0,0330 2,91 0,03

DE yield -1d2 -0,61 0,015 -0,10 0,0210 0,60 0,0230 1,34 0,02

German Bund (intraday, this week): Draghi rumours end correction higher

German 2/10yr spread differential: German curve approaches steepest shape in more than two years on global policy normalization

expectations

Draghi rumoured to give key note speech in Jackson Hole, hinting at end of QE

US inflation data key. Consensus expects further cooling down

Friday, 14 July 2017

P. 3

All eyes on US CPI inflation

Overnight, Asian stock markets trade mixed with Japan (+0.5%) outperforming. The US Note future and Brent crude trade stable, suggesting a neutral opening for the Bund.

Today’s eco calendar heats up in the US. If inflation surprises on the downside of expectations, we think that US Treasuries will gain ground and outperform Bunds. Such outperformance could in this scenario last until the July 26 Fed meeting, especially when taking into account potential US political upheaval (Russian investigation & health care bill). In case of a reading in line with forecast or stronger, we assume that we remain in a sell-on-upticks environment. The start of the Q2 earnings season (JP Morgan, Cititgroup, Wells Fargo) is a wildcard for trading.

From a technical point of view, the T-Note remained above the key 124-12/01+ support area (neckline double top/62% retracement) last week while the German Bund fell below similar support (now resistance) at 161.68/58. Next support stands at 160.17. If broken, this could point to a full retracement towards 158.89. We hold our longer term sell-on-upticks strategy in both the Bund and US Note future as markets reposition for a new stage in the global monetary cycle: policy normalisation (eg Bank of Canada’s rate hike and Draghi rumours earlier this week). The peak of central bank dovishness is behind us.

R2 164,13 -1dR1 161,68BUND 161,33 -0,27S1 160,17S2 159,1

German Bund: Sell-off pushed the Bund below the 161.68/58 support, making the technical picture bearish

US Note future: Some cracks in technical picture, but the 124/12/01+ key support remained out of sight

Friday, 14 July 2017

P. 4

EUR/USD: Today’s data to decide on next USD move

USD/JPY: test of 114.37 correction top rejected. Will US data be

strong enough for a retest?

US CPI to decide on dollar’s fate?

There was no dominant story to guide FX trading yesterday. The dollar remained in the defensive in the wake of Yellen’s testimony on Wednesday, but the pressure eased. Markets awaited today’s key US data. EUR/USD dropped temporary below 1.14, but rebounded on rumours that ECB’s Draghi might herald a policy change at Jackson Hole. EUR/USD closed the session at 1.1398. USD/JPY finished at 113.28.

Asian equities are trading mixed, awaiting key US data later today. Japanese equities outperform as USD/JPY regained the 113 mark. Markets are looking forward to next week’s BOJ policy meeting. The BOJ is expected to maintain its cap on the 10-year government bond yield even as rates in other major economies are trending higher. The pair trades in the 113.40 area. The Aussie dollar maintains this week’s gain and is near the 0.7750/0.7835 resistance area. EUR/USD remains in wait-and-see modus, holding in the low 1.14 area.

There are again no market moving European eco data today. However, US data might be decisive for the next directional move of the dollar, with June retail sales, CPI & production and July Michigan consumer confidence. Especially the retail sales and CPI are key. Core and headline CPI are both expected at 1.7% (0.2% M/M and 0.1% M/M). Retail sales are expected to regain traction after mediocre May data (but strong readings in March and April). Consensus expectations are not very high, both for the retail sales and the CPI. If inflation drifts further away from the 2%-mark (<1.7 % outcome) , it will almost certainly cause a further loss of interest rate support for the dollar. Consumer confidence from the University of Michigan is expected little changed at a high level (95).

Dollar sentiment remained fragile after Friday’s payrolls. Yellen putting the focus on inflation made markets ponder the pace of Fed normalisation and weighed further on the dollar. Yesterday, the dollar decline took a breather, but the picture US currency’s technical picture remains fragile. As we see a good chance for the data to meet the consensus, the dollar might start looking for a bottom after the recent setback. However, the is little room for miss, especially not for the CPI.

Currencies

R2 1,1616 -1dR1 1,15EUR/USD 1,1398 -0,0014S1 1,1119S2 1,0839

Dollar decline slows, at least temporary

US CPI and retail sales to dominate USD trading today

Dollar trades off the recent low, but no sustained rebound yet

AUD/USD near key resistance area

Friday, 14 July 2017

P. 5

Technical picture: USD looking for a bottom

A combination of hawkish ECB comments and soft US data pushed EUR/USD above the 1.1300/66 resistance area end June. The payrolls were not good enough to trigger a sustained USD rebound. Next resistance in the 1.15 area is looming. LT-correction tops stand at 1.1616/1.1714. A break would end the long consolidation period that followed the sharp decline of EUR/USD in 2014/early 2015. Such a key area will be difficult to break for now. A return below the 1.13 area would be a first indication of a loss in upside momentum. EUR/USD 1.1119/10 is the next important support.

The USD/JPY rally ran into resistance in early May and the pair returned lower in the 108.13/114.37 range. The post-Fed USD rebound pushed the pair above the 112.13 correction top, but follow-through gains remain modest. USD/JPY 114.37 resistance was tested, but for now the test is rejected. This at least suggests a pause in the recent USD/JPY uptrend. We stay cautious on USD/JPY long positions despite the recent good performance.

Sterling rebound to slow?

Sterling regained further ground yesterday, extending the rebound that started after good UK labour data. We see the rebound in the first place as technical in nature. Cable profited from underlying USD softness. A topside test of EUR/GBP was rejected on Wednesday and the broader euro correction also triggered further profit taking on EUR/GBP longs. The UK government published the Brexit ‘Repeal Bill’. It will probably become a source of political noise, but we didn’t see a big impact on sterling trading yesterday. BoE’s McCafferty further complicated the BoE’s monetary policy debate as he raised the issue of reducing the BoE’s Balance sheet. His comments might have been slightly supportive for sterling. EUR/GBP closed the session at 0.8809. Cable finished the day at 1.2939.

There are no important eco data in the UK today. There might still be some political noise on the Repeal bill, but we don’t expect it to change fortunes for the UK currency right now. So, the gyrations in the dollar might be decisive for sterling trading. The UK currency made a nice ST rebound, especially against the euro. This move might slow.

From a technical point of view, EUR/GBP set a minor top north of 0.8854/66 resistance (2017 top) and finally broke below the 0.8 barrier earlier this week. Quite some sterling negative news should already be discounted at current levels. Even so, the short-term trend remains euro positive/sterling negative. A test of the 0.90 barrier might be on the cards. A break below 0.8720 would suggest that upside momentum is easing.

R2 0,9142 -1dR1 0,9049EUR/GBP 0,8809 -0,0048S1 0,8757S2 0,8652

EUR/GBP topside test rejected, for now

GBP/USD balance of both USD softness and sterling weakness

Friday, 14 July 2017

P. 6

Friday, 14 July Consensus Previous US 14:30 CPI M/M Y/Y (Jun ) 0.1%/1.7% -0.1%/1.9% 14:30 CPI ex food & energy M/M Y/Y (Jun ) 0.2%/1.7% 0.1%/1.7% 14:30 Retail sales M/M (June) 0.1% -0.3% 14:30 Retail sales ex car & gasoline Y/Y (June) 0.4% 0% 14:30 Retail sales control group M/M (June) 0.3% 0% 15:15 Industrial production (M/M (June) 0.3% 0% 15:15 Manufacturing output M/M (June) 0.3% 0% 16:00 Michigan consumer sentiment (July P) 95 95.1 14:30 Michigan consumer sentiment current situation (July P) 112.0 112.5 14:30 Michigan consumer sentiment expectations (July P) 84.4 95.1 Japan 06:30 Industrial production M/M Y/Y (May F) A-3.6%/6.5% -3.3%/6.8% EMU 11:00 Trade balance SA (May) 20.2B 19.6B Italy 10:00 HICP inflation Y/Y(June F) 1.2% 1.2% 10:30 Trade balance EU/Total (May) 1048/3601 Events 15:00 Bank of Italy releases quarterly economic bulletin 15:30 Fed Kaplan speaks in Mexico City DBRS rates Italy’s sovereign debt 19:00 Chicago Fed to Post Evans’ Speech on Website

Calendar

Friday, 14 July 2017

P. 7

10-year Close -1d 2-year td -1d Stocks Close -1dUS 2,34 0,03 US 1,36 0,02 DOW 21553,09 20,95DE 0,60 0,02 DE -0,61 0,01 NASDAQ 6274,437 13,27BE 0,88 0,02 BE -0,48 0,01 NIKKEI 20118,86 19,05UK 1,30 0,04 UK 0,33 0,02 DAX 12641,33 14,75

JP 0,08 0,00 JP -0,11 0,00 DJ euro-50 3527,83 12,60

IRS EUR USD GBP EUR -1d -2d USD -1d -2d3y 0,00 1,74 0,77 Eonia -0,3600 -0,00105y 0,30 1,95 0,97 Euribor-1 -0,3730 0,0010 Libor-1 1,2244 0,000010y 0,94 2,30 1,34 Euribor-3 -0,3310 0,0000 Libor-3 1,3039 0,0000

Euribor-6 -0,2730 0,0000 Libor-6 1,4604 0,0000

Currencies Close -1d Currencies Close -1d Commodities Close -1d

EUR/USD 1,1398 -0,0014 EUR/JPY 129,13 -0,01 CRB 174,35 0,47USD/JPY 113,28 0,11 EUR/GBP 0,8809 -0,0048 Gold 1217,30 -1,80GBP/USD 1,2939 0,0054 EUR/CHF 1,1024 0,0007 Brent 48,42 0,68AUD/USD 0,7731 0,0053 EUR/SEK 9,5272 -0,0784USD/CAD 1,2722 -0,0029 EUR/NOK 9,4136 -0,0397

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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