Thursday, 01 June 2017

P. 1

Rates: US 10-yr yield heading for test of 2.16% support?

Today’s market calendar heats up in the US. Risks for ADP are tilted on the downside of expectations while the price component of the manufacturing ISM could disappoint as well. This combination could push the US 10-yr yield for a test of 2.16% support (currently 2.21%) and push the US Note future temporary to a new contract high.

Currencies: Euro holds strong even as EMU inflation declines

Yesterday, the euro outperformed the other majors even as EMU inflation dropped more than expected. The dollar remained in the defensive. Today, the focus is on the US ADP report and the manufacturing ISM, ahead of tomorrow’s key payrolls. A test of EUR/USD 1.1268 resistance is likely. Sterling still feels political headwinds.

Calendar

• US equities managed to undo initial weakness and closed the day marginally

lower. Overnight, Japanese stocks outperform on strong data (capex, PMI, company profits) while China loses ground on a sub-50 PMI reading.

• President Trump said he would make an announcement today on the Paris climate treaty, with White House officials saying he is expected to withdraw from the accord, although they cautioned that the situation may yet change

• SF Fed Williams said that 3 rate increases is a reasonable view for this year, but there is upside potential for the economy which would warrant 4 hikes. He isn’t worried about recent inflation data which reflect “temporary factors”.

• The private Chinese Caixin manufacturing PMI fell to 49.6 from 50.3 in April (vs 50.1 consensus), the lowest level since June 2016 and back below the boom/bust mark (50).

• The US economy expanded at a modest to moderate pace from early April through late May but showed little sign of breaking out of a recent trend of sluggish inflation, the latest Beige Book showed.

• Brazil’s central bank slashed the key interest rate from 11.25% to 10.25%, continuing its pace of cuts amid a political crisis that has sown uncertainty just as the economy was seen as crawling back from its worst recession ever.

• Today’s eco calendar is interesting with ADP employment, weekly claims and manufacturing PMI/ISM’s in EMU (final), the UK and the US. Spain and France tap the market. Several ECB governors speak at Brussels economic forum and Fed Powell talks on the normalization of monetary policy.

Headlines

S&PEurostoxx 50NikkeiOilCRB

Gold2 yr US10 yr US

2yr DE10 yr DEEUR/USDUSD/JPYEUR/GBP

Thursday, 01 June 2017

P. 2

US Treasuries outperform German Bunds

Global core bond investors remained side-lined yesterday ahead of key US eco data today (ADP, manufacturing ISM) and tomorrow (payrolls). US Treasuries marginally outperformed German Bunds as US stocks suffered in the opening. Investors reacted on rumours that Trump would pull from the Paris climate deal and on comments by executives of JP Morgan and BoA who said that low market volatility is weighing on Q2 trading revenue. US equities eventually managed to erase most of the losses to close nearly unchanged. EMU and US eco data were a mixed bag and irrelevant to trading. Brent crude suffered another blow, nearly testing the psychological $50/barrel mark, but couldn’t lift core bonds.

The Fed’s Beige Book, a preparatory document for the June policy meeting, was slightly less upbeat, but still in line with modest-to-moderate expansion, tight labor market conditions and some upward pressure on wages and prices. We expect a 25 bps rate hike at the next Fed meeting (June 14).

At the end of the session, the German yield curve steepened with yield changes ranging between -0.7 bps (2-yr) and +1.7 bps (30-yr). The US yield curve marginally bull flattened with yields 0.2 bps (2-yr) to 1.4 bps (30-yr) lower. On intra-EMU bond markets, 10-yr yield spread changes versus Germany ranged between -1 bps and +2 bps with Portugal outperforming (-6 bps).

Interesting US eco calendar

Today’s eco calendar heats up in the US with ADP employment, weekly jobless claims and the manufacturing ISM. Consensus expects net job growth of 180k in May, in line with the April outcome (177k) which followed on the heels of 5 consecutive >200k readings. Employment indices in April manufacturing and services ISM’s cooled, suggesting risks are tilted to the downside. Weekly jobless claims are forecast to hover near historically low levels (238k). The manufacturing ISM is predicted to stabilize around the April level (54.6 from 54.8). This month’s regional Fed manufacturing surveys were a mixed bag with stronger than forecast readings in Philadelphia, Chicago & Dallas and weaker ones in NY, Richmond & Kansas. We have no reason to distance ourselves from consensus. The price component of the report (67.0) is expected to remain at very lofty levels with some room for disappointment given the recent evolution of other price indicators. Fed governor Powell is scheduled to speak. The Washington-based governor is one of the last ones to speak before the communication blackout period kicks in (June 3). We anticipate he will give a consensus view on interest rate policy (next hike “soon”) and balance sheet tapering (slow start around the turn of the year). Several ECB members speak in panel discussions at the Brussels Economic Forum.

Rates

US yield -1d2 1,29 -0,015 1,76 -0,0110 2,21 -0,0130 2,87 -0,01

DE yield -1d2 -0,72 -0,015 -0,43 0,0010 0,31 0,0230 1,17 0,02

US stocks recover from sharp decline in market opening

S&P future (blue) and T Note future (red) (intraday): US Treasuries gain some ground on weak stock market opening

US 10-yr yield sliding towards 2.16% support

Fed’s Beige Book paves the way for June rate hike

Downside risks for ADP employment

Neutral view for ISM manufacturing, but room for disappointment in price component

Thursday, 01 June 2017

P. 3

France and Spain conclude scheduled supply

The French debt agency sells three OAT’s for a combined €7.5-8.5B: 1% May2027, 5.75% Oct2032 and 1.75% Jun2039. Bonds on offer traded steady into the auction and are normal on the curve. The Spanish Tesoro launches a new 3-yr Bono (0.05% Jan2021) and taps the 50-yr Obligacion (3.45% Jul2066) for a total amount of €3.5-4.5B. Grey market trading suggests that the bond will be priced with a 5.3 bps pick-up compared to the 1.15% Jul2020 SPGB. That corresponds with a 12 bps pick-up in yield terms. The very long Spanish bonds cheapened slightly ahead of the auction and are trading normal on the Spanish curve. Overall, we expect both the French and Spanish auction to be decent.

US 10-yr yield heading for test of 2.16% support?

Overnight, most Asian stock markets trade positive with Japan outperforming on the back of stronger eco data and China underperforming following a sub-50 PMI reading. The US Note future trades stable. We expect a neutral opening for the Bund.

Today’s market calendar heats up in the US. Risks for ADP are tilted on the downside of expectations while the price component of the manufacturing ISM could disappoint as well. This combination could push the US 10-yr yield for a test of 2.16% support (currently 2.21%) and push the US Note future temporary to a new contract high. US Treasuries could also find support from a potential risk-off correction stock markets if Trump officially pulls the US out of the Paris climate deal. This week’s outperformance of US Treasuries vs German Bunds could continue.

Technically, we expect the Bund to stay in a range defined between 160 (recent sell-off low) and 162.15/49 (recent highs/gap) even if we tested the upside earlier this week in extremely low volume trading. The US Note future could temporary reach new contract highs, but we don’t expect much upward potential given that we’re on the brink of another Fed rate hike and balance sheet tapering. We wait to enter new short positions.

R2 163,99 -1dR1 162,49BUND 162,19 -0,16S1 160S2 158,73

German Bund: Range-trading in 160-to-162.15/49 band preferred. First test upside in thin trading conditions

US Note future (September contract!!!): US 10-yr yield heading for test of 2.16% support (currently 2.21%), suggesting T Note future

could temporary reach new contract high

Thursday, 01 June 2017

P. 4

EUR/USD: holding near recent top. US eco data to decide whether there

is room for further gains USD/JPY: downside pressure persists. Test of the 110.24

correction low might be on the cards

Euro rebounds. Dollar continues to struggle.

The euro outperformed other major currencies yesterday. EMU inflation declined more than expected, but German and EMU unemployment beat market consensus. The combination of good growth, low inflation and the expectation of only gradual ECB normalisation supported European assets and the euro. At the same time, the dollar remained in the defensive. EUR/USD came within reach of the 1.1268 correction top, but a real test didn’t occur. The pair closed the day at 1.1244. USD/JPY remained in the defensive even as US equities reversed most of the intraday dip. The pair finished the day at 110.78.

Overnight, country specific issues dominated trading in several Asian markets. Positive capital spending data and corporate profits supported Japanese equities. The yen stays strong despite positive risk sentiment. USD/JPY hovers in the 111 area. A rebound in the oil price is also slightly positive for regional sentiment. The Chinese picture is a bit ambiguous. The Caixin manufacturing PMI dropped below 50 (49.6) and weighs on Chinese equities. At the same time, the yuan jumps sharply higher. Chinese authorities apparently want to discourage CNY/CNH shorts and fixed CNY/USD sharply stronger. The poor Chinese PMI and disappointing domestic capital spending also weigh on the Aussie dollar. AUD/USD dropped to the 0.74 area. EUR/USD maintains yesterday’s gains.

The EMU manufacturing PMI is expected to confirm the strong preliminary ready (57) today. However the focus for trading will be on the US data. ADP private job creation is expected more or less stable at 180K. Recent labour sub-indices in other surveys showed a loss of momentum. Is there a risk for a downward ADP surprise? The US ISM manufacturing is expected little changed at 54.7. We don’t have much reason to take different view from the consensus. We also keep an eye at the prices sub-index. Here is maybe a risk for some easing. To conclude: US data might confirm a scenario of decent growth, but a negative surprise is possible. Over the previous days, the decline of the dollar slowed and the euro rally took a breather. Yesterday’s price action suggested that both underlying trends aren’t over yet. Of late, the USD’s reaction to the ISM and ADP was often modest. The payrolls are more important. Even so, we don’t expect the US data to provide much USD support. CB speakers and the decision of Trump on the Paris Climate agreement (risk-off in case of a rejection?) are wildcards. A real test of the EUR/USD top at 1.1268 is likely. USD/JPY hardly profits from constructive risk sentiment.

Currencies

R2 1,1428 -1dR1 1,1268EUR/USD 1,1235 0,0069S1 1,0839S2 1,0778

Will US eco data be strong enough to defend the US downside?

Soft Draghi comments cap EUR/USD topside

Euro remains in the driver’s seat even as EMU inflation declines more than expected

Yen remains strong even as Japanese equities rally

PBOC fixes Yuan sharply stronger

AUD/USD drops to 0.74 area

EUR/USD holds near the recent highs

Thursday, 01 June 2017

P. 5

In a broader perspective, the dollar traded soft recently. US data were a bit disappointing, markets turned more cautious on Trump’s pro-growth agenda and US yields declined. At the same time, the euro profited of reduced political risk on the region. Last week, there were tentative signs that the dollar decline could slow. However, the jury is still out whether enough USD softness is discounted? This week’s payrolls and, to a lesser extent today’s ISM, might be important in this assessment.

Technical picture

The USD/JPY rally ran into resistance early May. A mini-sell-off pushed the pair below the previous top (112.20), making the short-term picture negative. Return action lower in the 108.13/114.37 range is possible.

Earlier this month, it looked that EUR/USD could revisit 1.0821/1.0778 support (gap), but poor US data and political upheaval propelled EUR/USD north of the 1.1023 range top. The pair reached a short-term correction top at 1.1268. The correction top at 1.1300/1.1366 is next resistance. USD sentiment will have to be extremely negative to clear this hurdle short-term. So, a clean break of this won’t be that easy. A return below 1.1023 would indicate that the upside momentum has eased.

Sterling decline slows, but political uncertainty still weighs

Yesterday morning, investors sold sterling after a YouGov poll indicated that the Conservative party might fail to secure a majority in the June 08 election. Other polls still indicate quite a substantial lead for PM May. Cable dropped temporary below 1.28. EUR/GBP rebounded north of 0.87. The pressure on sterling eased later in the session, maybe as other polls still give quite a significant lead for the conservative party. Especially cable rebounded and closed the session at 1.2890, reversing the overnight loss. EUR/GBP closed the session at 0.8723, still within reach of the recent top.

Today, the UK manufacturing PMI is expected to decline slightly from 57.3 to 56.5. However, the focus for sterling trading remains on the potential outcome of the UK election. Political uncertainty will probably prevent a sustained sterling rebound before the June 08 election. However, in a day-to day perspective, sterling could enter some calmer waters as quite some negative news should already be discounted after the recent sell-off. Next resistance comes in 0.8788.

R2 0,8854 -1dR1 0,8787EUR/GBP 0,8738 0,0016S1 0,8383S2 0,8314

EUR/GBP nears recent highs as election uncertainty grows

GBP/USD: off 1.30 top, but decline remains modest as dollar softens and sterling weakness counterbalance each other

Thursday, 01 June 2017

P. 6

Thursday, 1 June Consensus Previous US 13:30 Challenger Job Cuts YoY (May) -- -42.9% 14:15 ADP Employment Change (May) 180k 177k 14:30 Initial Jobless Claims 238k 234k 14:30 Continuing Claims 1920k 1923k 16:00 ISM Manufacturing (May) 54.7 54.8 16:00 ISM Prices Paid (May) 67.0 68.5 16:00 ISM New Orders (May) -- 57.5 16:00 ISM Employment (May) -- 52.0 16:00 Construction Spending MoM (Apr) 0.5% -0.2% Japan 01:50 Capital Spending YoY (1Q) A: 4.5% 3.8% 01:50 Company Profits (1Q) A: 26.6% 16.9% 01:50 Company Sales (1Q) A: 5.6% 2.0% 02:30 Nikkei Japan PMI Mfg (May F) A: 53.1 52.0 07:00 Vehicle Sales YoY (May) A: 6.1% 5.4% China 03:45 Caixin China PMI Mfg (May) A: 49.6 50.3 UK 08:00 Nationwide House PX MoM / NSA YoY (May) 0.2%/2.4% -0.4%/2.6% 10:30 Markit UK PMI Manufacturing SA (May) 56.5 57.3 EMU 10:00 Markit Eurozone Manufacturing PMI (May F) 57.0 57.0 Germany 09:55 Markit/BME Germany Manufacturing PMI (May F) 59.4 59.4 France 09:50 Markit France Manufacturing PMI (May F) 54.0 54.0 Italy 09:45 Markit/ADACI Italy Manufacturing PMI (May) 56.0 56.2 10:00 GDP WDA QoQ / YoY (1Q F) 0.2%/0.8% 0.2%/0.8% Spain 09:15 Markit Spain Manufacturing PMI (May) 54.7 54.5 Norway 09:00 Manufacturing PMI (May) 55.0 54.7 Sweden 08:30 Swedbank/Silf PMI Manufacturing (May) 62.4 62.5 Events 02:10 Fed's Williams Speaks in Seoul 09:15 ECB's Villeroy Speaks at Brussels Economic Forum in Brussels 10:30 Spain to sell 0.05% 2021, 1% I/L 2030 and 3.45% 2066 Bonds 10:50 France to sell 1% 2027, 5.75% 2032 and 1.75% 2039 Bonds 11:00 EU's Dombrovskis Speaks at Brussels Economic Forum 11:00 ECB's Hakkarainen, Costa, EBA's Enria Speak in Lisbon 14:00 EU's Moscovici Speaks at Brussels Economic Forum in Brussels 14:00 Fed's Powell Speaks on Normalization of Monetary Policy

Calendar

Thursday, 01 June 2017

P. 7

10-year td -1d 2-year td -1d Stocks td -1dUS 2,21 -0,01 US 1,29 -0,01 DOW 21008,65 -20,82DE 0,31 0,02 DE -0,72 -0,01 NASDAQ 6198,517 -4,67BE 0,66 0,01 BE -0,57 -0,01 NIKKEI 19860,03 209,46UK 1,05 0,05 UK 0,13 0,05 DAX 12615,06 16,38

JP 0,05 0,00 JP -0,16 -0,01 DJ euro-50 3554,59 -6,63

IRS EUR USD GBP EUR -1d -2d USD td -1d3y -0,07 1,65 0,60 Eonia -0,3480 0,01305y 0,16 1,84 0,77 Euribor-1 -0,3740 -0,0010 Libor-1 1,0505 0,005810y 0,78 2,15 1,12 Euribor-3 -0,3290 0,0000 Libor-3 1,2018 0,0000

Euribor-6 -0,2540 0,0000 Libor-6 1,4149 0,0011

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

EUR/USD 1,1235 0,0069 EUR/JPY 124,68 0,75 CRB 179,77 -1,56USD/JPY 110,97 -0,02 EUR/GBP 0,8738 0,0016 Gold 1269,30 5,80GBP/USD 1,2858 0,0055 EUR/CHF 1,0890 -0,0007 Brent 51,16 -0,36AUD/USD 0,7399 -0,0052 EUR/SEK 9,7625 0,0003USD/CAD 1,3501 0,0048 EUR/NOK 9,4707 0,0289

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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