Friday, 05 January 2018

P. 1

Rates: Big day ahead

Today’s eco calendar heats up with EMU CPI, US Payrolls and US non-manufacturing ISM. We have a positive intraday bias for core bonds especially if this week’s risk/oil rally shows signs of fatigue. The risk scenario is a big upward surprise in the average hourly earnings components in the US payrolls report.

Currencies: EUR/USD testing range top ahead of the US payrolls

Yesterday, the dollar showed a mixed picture and couldn’t fully profit from a very strong ADP labour market report. Today, EMU inflation is expected soft, but it isn’t evident that this will break the strong euro momentum. The dollar probably needs very strong payrolls and, in particular strong wage data, to change fortunes.

Calendar

• US stock markets closed positively with Nasdaq slightly underperforming

because of the Intel chip’s flaws. Asian stock markets copy WS’s positive risk sentiment with Korea and Japan outperforming.

• The Trump administration proposed opening up nearly all the country’s offshore areas for oil and gas drilling, a move that would touch every coastal state, some that have been off limits to drillers for decades.

• Australia's trade deficit widened to A$628 million ($494 million) in November from a revised A$302 million a month earlier. Expectations were for an A$550 million surplus. AUD/USD slightly suffered, declining to 0.7850.

• UK shop prices slipped further into deflationary territory as retailers offered discounts on non-food products, according to the British Retail Consortium. The BRC-Nielsen shop price index found prices fell 0.6% Y/Y in December.

• China released new rules tightening bond trading regulations, with a focus on restricting leverage and banning under-the-table deals.

• North Korea accepted a proposal to hold talks with South Korea on Tuesday, reducing tensions as President Moon Jae-in’s government prepares to host the Winter Olympics next month.

• Today’s eco calendar heats up with EMU CPI data, US payrolls and US non-manufacturing ISM. Fed Harker and Mester are scheduled to speak.

Headlines

S&PEurostoxx 50NikkeiOilCRB

Gold2 yr US10 yr US

2yr DE10 yr DEEUR/USDUSD/JPYEUR/GBP

Friday, 05 January 2018

P. 2

Important day ahead!

Global core bonds took a different direction yesterday. The Bund gained some ground towards the end of the session while the US Note future ended nearly unchanged, ultimately reversing a dip following a stellar US ADP report. Today’s pending eco data (EMU CPI, US payrolls and US non-manufacturing ISM) kept most investors cautious. Equity sentiment remained buoyant, especially in Europe, despite extensive media coverage about Intel’s chip flaws. Brent crude managed to hold recent gains, stabilizing around $68/barrel.

In a daily perspective, the German yield curve flattened with yield changes ranging between +0.6 bps (2-yr) and -1.1 bp (30-yr). The US yield curve shifted up to 2.3 bps (5-yr) higher. Peripheral bonds outperformed on intra-EMU bond markets. The 10y Greek spread vs Germany dropped by 16 bps, the Portuguese one shed 6 bps and Spanish/Italian spreads declined by 5 bps. A strong Spanish auction was supportive together with general risk sentiment.

Asian stock markets trade positive overnight in line with the US yesterday. Korea and Japan outperform while China lags. The US Note future and Brent crude stabilize, suggesting a neutral opening for the Bund. Today’s eco calendar heats up. The first important release is EMU CPI. Consensus expects a decline in headline inflation from 1.5% Y/Y to 1.4% Y/Y and a pick-up in the core reading from 0.9% Y/Y to 1.0% Y/Y. Following the release of German, Spanish & Belgian December CPI readings and taking into account a huge base effect, we expect a below-or-on consensus outcome which could be slightly beneficial to the Bund. Any correction on this week’s risk/oil rally argues in the same direction. The second item on the agenda are US payrolls. Consensus expects 188k net job growth in December. Strength in ADP-report, weekly claims and employment indices in several other indicators suggest upside risks. However, markets will probably focus on average hourly earnings (0.3% M/M, 2.5% Y/Y). A stronger-than-expected outcome could force a test/break of the 123-12+ low in the US Note future. Disappointing AHE will probably trigger rebound action towards 124-02+ and blow-off the downside alert. The unemployment rate is forecast to stabilize at 4.1%. The US non-manufacturing ISM has the final say, but yesterday’s market reaction shows that activity data are far less important at this stage than price/inflation numbers. To conclude: we have a positive intraday bias for core bonds unless AHE are strong and beat consensus. This might prove an opportunity to sell-the-uptick. Medium term, we hold our bearish bias on core bonds. In yield terms, we eye a move to 0.63% for the German 10-yr yield and 2.64% for the US 10-yr yield.

Rates

US yield -1d2 1,95 0,025 2,27 0,0210 2,45 0,0130 2,79 0,00

DE yield -1d2 -0,61 0,015 -0,21 0,0010 0,43 -0,0130 1,26 -0,01

German Bund: some technical buying yesterday following the sell-off since mid-December

US Note future: stronger earnings or higher inflation (later this month) necessary to test/break contract low

Af

Friday, 05 January 2018

P. 3

EUR/USD holding near 1.2092 range top going into US payrolls report

EUR/GBP: Consolidation continues. No sterling comeback for now

EUR/USD testing cycle top ahead of payrolls

The dollar showed a mixed picture yesterday. It returned most of Wednesday’s gains against the euro. A very strong ADP labour report couldn’t change fortunes in favour of the dollar. Strong growth prospects for EMU kept the euro well supported. EUR/USD tested the 1.2081/92 range top, but a break didn’t occur (close at 1.2068). At the same time, USD/JPY profited from slightly higher US yields and buoyant risk sentiment. The pair filled offers in the 112.85 area and closed at 112.75. The combined rise of both EUR/USD and USD/JPY propelled EUR/JPY above 136, the highest level since October 2015.

The risk rally continues overnight, but the pace is easing a bit. The USD trading pattern persists. EUR/USD holds within reach of the 2017 top. USD/JPY maintains a good bid and tries to regain the 113 handle. The recent rally of the Aussie dollar was blocked as the country recorded an unexpected trade deficit in November. AUD/USD returned to the 0.7850 area. Today, the EMU December CPI is expected to have declined to 1.4% Y/Y from 1.5%. A big base effect is at play. An upward surprise looks unlikely. Question is whether a soft EMU CPI will block the recent strong euro momentum. In the US, the payrolls, the non-manufacturing ISM, the trade balance and the order data will be published. Evidently, the focus will be on the payrolls and in particular on the wage data. The consensus expects a rise of 0.3% M/M and 2.5% Y/Y. This consensus probably needs to be met (or surpassed) to prevent further USD losses. Recently, the greenback suffered as the global recovery might force other major CB’s (including ECB) to join policy normalisation. For now, we maintained the working hypothesis that enough good news on the euro/’bad news’ on the dollar was discounted and that a sustained break beyond the 1.2092 cycle top is not evident. Today’s payrolls (wage data) might decide whether this approach remains valid.

Yesterday, UK eco data had only a limited impact on sterling trading. The overall rise of the euro helped EUR/GBP to regain the 0.89 barrier. Cable (close 1.3550) gained slightly as the dollar held a soft bias. There are only second tier UK eco data today. Sterling is rather well bid this morning despite soft BRC shop price data. EUR/GBP struggles not the fall back below the 0.89 mark. We expect more sideways trading today. Recent UK data were mixed. We don’t expect the BoE to raise interest rates soon. EUR/GBP 0.8700/60 support looks solid. Euro strength or soft UK data might keep EUR/GBP 0.90 on the radar further down the road. We keep a EUR/GBP buy-on-dips in case of return action to 0.87.

Currencies

R2 1,2225 -1dR1 1,2092EUR/USD 1,2068 0,0053S1 1,1713S2 1,1554

R2 0,9307 -1dR1 0,9033EUR/GBP 0,8906 0,0016S1 0,8690S2 0,8657

Friday, 05 January 2018

P. 4

Friday, 5 January Consensus Previous US 14:30 Change in Nonfarm Payrolls (Dec) 190k 228k 14:30 Two-Month Payroll Net Revision (Dec) -- -- 14:30 Change in Private Payrolls (Dec) 193k 221k 14:30 Change in Manufact. Payrolls (Dec) 18k 31k 14:30 Unemployment Rate (Dec) 4.1% 4.1% 14:30 Average Hourly Earnings MoM / YoY (Dec) 0.3%/2.5% 0.2%/2.5% 14:30 Average Weekly Hours All Employees (Dec) 34.5 34.5 14:30 Labor Force Participation Rate (Dec) -- 62.7% 14:30 Underemployment Rate (Dec) -- 8.0% 14:30 Trade Balance (Nov) -$49.9b -$48.7b 16:00 ISM Non-Manf. Composite (Dec) 57.6 57.4 16:00 Factory Orders (Nov) 1.1% -0.1% 16:00 Durable Goods Orders (Nov F) -- 1.3% Canada 14:30 Net Change in Employment (Dec) 2.0k 79.5k 14:30 Unemployment Rate (Dec) 6.0% 5.9% Japan 00:50 Monetary Base YoY (Dec) A: 11.2% 13.2% 01:30 Nikkei Japan PMI Services (Dec) A: 51.1 51.2 01:30 Nikkei Japan PMI Composite (Dec) A: 52.2 52.2 06:00 Vehicle Sales YoY (Dec) A: -1.0% -5.4% UK 01:01 BRC Shop Price Index YoY (Dec) A: -0.6% -0.1% 10:00 New Car Registrations YoY (Dec) -- -11.2% 10:30 Unit Labor Costs YoY (3Q) -- 2.4% EMU 11:00 PPI MoM / YoY (Nov) 0.3%/2.5% 0.4%/2.5% 11:00 CPI Core YoY (Dec A) 1.0% 0.9% 11:00 CPI Estimate YoY (Dec) 1.4% 1.5% Germany 08:00 Retail Sales MoM / YoY (Nov) 1.0%/2.3% -1.0%/-1.4% France 08:45 Consumer Confidence (Dec) 103 102 08:45 CPI EU Harmonized MoM / YoY (Dec P) 0.4%/1.3% 0.1%/1.2% Italy 11:00 CPI EU Harmonized MoM / YoY (Dec P) 0.3%/1.1% -0.2%/1.1% Events 14:30 Revisions: Seasonally Adjusted Household Survey data 16:15 Fed's Harker Speaks on the Economic Outlook at AEA 18:30 Fed's Mester Speaks on Panel on Monetary Policy Coordination

Calendar

Friday, 05 January 2018

P. 5

10-year Close -1d 2-year Close -1d Stocks Close -1dUS 2,45 0,01 US 1,95 0,02 DOW 25075,13 152,45DE 0,43 -0,01 DE -0,61 0,01 NASDAQ 7077,915 12,38BE 0,65 -0,01 BE -0,51 0,01 NIKKEI 23714,53 208,20UK 1,23 0,02 UK 0,49 0,03 DAX 13167,89 189,68

JP 0,06 0,00 JP -0,14 0,00 DJ euro-50 3568,88 59,00

IRS EUR USD GBP EUR -1d -2d USD -1d -2d3y 0,00 2,23 0,89 Eonia -0,3560 0,00005y 0,30 2,31 1,05 Euribor-1 -0,3680 0,0000 Libor-1 1,5569 0,000010y 0,88 2,45 1,29 Euribor-3 -0,3290 0,0000 Libor-3 1,6959 0,0000

Euribor-6 -0,2710 0,0000 Libor-6 1,8427 0,0000

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

EUR/USD 1,2068 0,0053 EUR/JPY 136,07 0,90 CRB 195,37 0,02USD/JPY 112,75 0,24 EUR/GBP 0,8906 0,0016 Gold 1321,60 3,10GBP/USD 1,3551 0,0035 EUR/CHF 1,1757 0,0017 Brent 68,07 0,23AUD/USD 0,7864 0,0028 EUR/SEK 9,8195 -0,0040USD/CAD 1,2487 -0,0049 EUR/NOK 9,7357 -0,0019

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