Thursday, 04 January 2018

P. 1

Rates: Sentiment-driven trading ahead of payrolls?

We expect trading to be subdued and sentiment-driven today ahead of tomorrow’s US payrolls report. Ongoing strength on stock and oil markets might weigh on core bonds. The US Note future closes in on the contract low, but higher earnings/inflation readings will probably be necessary to trigger a break.

Currencies: Dollar bottoms going into tomorrow’s key US payrolls

The recent USD decline slowed yesterday. Technical considerations (EUR/USD coming close to the cycle top) and strong US eco data helped to put a floor for the dollar. We expect the dollar to hold a wait-and-see mode today. Sterling tried to change fortunes at the first day of the year, but failed to sustain that constructive momentum.

Calendar

• US stock markets extended their record race, eking out gains between +0.4%

and +0.84%. Asian risk sentiment is positive as well with Japan outperforming on their first trading day of the new year in a catch-up move.

• FOMC Minutes showed that Fed members wrestled with how much of an economic impact to expect from Donald Trump’s tax cuts as they raised rates last month and continued to be flummoxed by persistent low inflation.

• China's services sector activity expanded at its fastest pace in over three years in December on solid growth in new business, with the outlook improving to a six-month high, the Caixin Chinese services PMI showed (rise to 53.9).

• UK PM May believes Barnier is bluffing when he says there will be no special deal for financial services, officials said, as the UK prepares to negotiate its post-Brexit ties with the EU.

• Chancellor Merkel’s Christian Democrat-led bloc and its prospective coalition partner, the SPD, said the chances of a successful conclusion to their exploratory talks have improved after a meeting in Berlin yesterday.

• The US auto industry suffered its first annual sales decline since the financial crisis eight years ago, but a streak of strong profits is expected to overshadow a slowdown in dealership traffic.

• Today’s eco calendar contains services PMI’s in the UK and EMU (final), US ADP employment and weekly jobless claims. Spain and France tap the market while Fed Bullard is scheduled to speak.

Headlines

S&PEurostoxx 50NikkeiOilCRB

Gold2 yr US10 yr US

2yr DE10 yr DEEUR/USDUSD/JPYEUR/GBP

Thursday, 04 January 2018

P. 2

Sentiment-driven trading ahead of payrolls/AHE?

Global core bonds gained slightly ground yesterday despite buoyant stock markets, higher oil prices and a very strong US manufacturing ISM (59.7). Some technical buying might have been at play following the sell-off since mid-December (especially for the Bund). The front end of the US yield curve underperformed after the publication of FOMC Minutes. They showed solid support for three rate hikes this year despite some discussions on the (limited?) positive effect on investments and consumer spending from the US tax cuts and on mysteriously low inflation. The market implied probability of a March rate hike, our preferred scenario, increased from 72.5% to 77.5%.

In a daily perspective, both the German and US yield curve flattened. German yields declined by 0.5 bps (2-yr) to 4.3 bps (30-yr). Changes on the US yield curve ranged between +1.2 bps (2-yr) and -2.8 bps (30-yr). On intra-EMU bond markets, 10-yr yield spread changes versus Germany ended close to unchanged with Ireland (-2 bps; successful €4 bn 10-yr syndication) and Greece (-6 bps) outperforming.

Asian stock markets trade positive overnight in line with the US yesterday. Japan outperforms in a catch-up move. Brent crude extends its rally and the US Note future loses ground, suggesting a weaker opening for the Bund. We expect trading to be subdued and sentiment-driven today ahead of tomorrow’s payrolls report. Continued strength on equity and oil markets might be negative for core bonds, even if that correlation didn’t exist yesterday. Global services PMI’s (final PMI in EMU) and the US ADP employment report feature on today’s agenda, but will only be of second tier importance. St.-Louis Fed Bullard speaks, but he is known for his diverging, dovish, view. EMU bond supply picks up with Spanish and French auctions, which are expected to go well.

German Bund sentiment deteriorated sharply since the end of last month. Strong present and expected growth warrant more downside. We think that the ECB will have to change its guidance on APP and interest rates in 2018, acknowledging the economic developments. We hold our short positions and target the September low (159.78). For the US Note future, we eye a test of the 123-12+ low. Stronger-than-expected average hourly earnings (tomorrow) or higher inflation readings later this month will probably be necessary to force a break. US politics might return to the surface as a risk scenario (generating safe haven flows) as US Congress faces a Jan 19 deadline to agree a spending bill and avoid a government shutdown.

Rates

US yield -1d2 1,93 0,015 2,26 0,0010 2,45 -0,0230 2,79 -0,03

DE yield -1d2 -0,62 -0,015 -0,21 -0,0210 0,44 -0,0330 1,27 -0,04

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

US Note future: stronger earnings (tomorrow) or higher inflation (later this month) necessary to break below contract low?

Af

Thursday, 04 January 2018

P. 3

EUR/USD topside test rejected

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

Dollar decline slows ahead of the payrolls

The dollar’s slide slowed yesterday. The US currency regained modest ground against the euro as interest rate differentials widened again slightly. US data (auto sales & Manufacturing ISM) were better than expected, adding to USD constructive sentiment. The Fed minutes revealed different views on persistent low inflation and on the Fed’s policy approach, but a majority of governors supports gradual normalisation. EUR/USD closed the day at 1.2010, off Tuesdays top of 1.2081. USD/JPY bottomed, finishing the day at 112.51.

The risk rally continues in Asia overnight, but the dollar holds near yesterday’s closing. EMU services PMI’s are expected to confirm strong readings from the preliminary report today. US ADP private job creation is expected at a solid 190 000. US jobless claims are expected marginally higher. US data will likely be OK, but won’t change the broader picture ahead of tomorrow’s US payrolls. Risk sentiment stays constructive, but is less supportive for the dollar than it was in the past. The USD might stabilize off recent lows ahead of the payrolls. Recently, the greenback suffered as the global recovery could force other major CB’s (including ECB) to join policy normalisation. Still, we maintain the working hypothesis that it won’t be that easy for EUR/USD to set a new cycle high without really important news. US payrolls and especially wage growth will be key for the next directional USD move.

Global picture USD: The Dec Fed & ECB meetings didn’t bring clear directional guidance for EUR/USD. A narrowing in the (LT) interest rate differential finally drove EUR/USD to the topside of the 1.1554/1.2090 range. A break would improve the ST picture. We don’t preposition for such a break, yet. Quite some good news on the euro/bad news on the dollar should be discounted. Price data remain in focus.

Sterling yesterday failed to hold a tentative improvement from the first day of the year. In order-driven trade, GBP lost ground against the euro and the dollar. Today’s UK services PMI is expected marginally stronger at 54.0. Brexit noise might resurface as negotiators prepare next steps. EUR/GBP showed a consolidation pattern of late. We don’t see a trigger for a big GBP comeback. A EUR/GBP rebound above 0.89 might reinforce the euro positive/sterling negative momentum. Recent UK data were mixed. We don’t expect the BoE to raise interest rates soon. The EUR/GBP 0.8700/60 support looks solid. Ongoing 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 1,2015 -0,0044S1 1,1713S2 1,1554

R2 0,9307 -1dR1 0,9033EUR/GBP 0,8890 0,0017S1 0,8690S2 0,8657

Thursday, 04 January 2018

P. 4

Thursday, 4 January Consensus Previous US 14:15 ADP Employment Change (Dec) 190k 190k 14:30 Initial Jobless Claims 241k 245k 14:30 Continuing Claims 1925k 1943k Japan 01:30 Nikkei Japan PMI Mfg (Dec F) A: 54.0 54.2 China 02:45 Caixin China PMI Composite (Dec) A: 53.0 51.6 02:45 Caixin China PMI Services (Dec) A: 53.9 51.9 UK 08:00 Nationwide House PX MoM / NSA YoY (Dec) 0.1%/2.0% 0.1%/2.5% 10:30 Official Reserves Changes (Dec) -- $865m 10:30 Net Consumer Credit (Nov) 1.5b 1.5b 10:30 Money Supply M4 MoM / YoY (Nov) --/-- 0.6%/4.1% 10:30 Markit/CIPS UK Services PMI (Dec) 54.0 53.8 10:30 Markit/CIPS UK Composite PMI (Dec) 55.0 54.9 EMU 10:00 Markit Eurozone Services PMI (Dec F) 56.5 56.5 10:00 Markit Eurozone Composite PMI (Dec F) 58.0 58.0 Germany 09:55 Markit Germany Services PMI (Dec F) 55.8 55.8 09:55 Markit/BME Germany Composite PMI (Dec F) 58.7 58.7 France 09:50 Markit France Services PMI (Dec F) 59.4 59.4 09:50 Markit France Composite PMI (Dec F) 60.0 60.0 Italy 09:45 Markit/ADACI Italy Services PMI (Dec) 54.7 54.7 09:45 Markit/ADACI Italy Composite PMI (Dec) 56.0 56.0 Spain 09:15 Markit Spain Services PMI (Dec) 54.6 54.4 09:15 Markit Spain Composite PMI (Dec) 55.4 55.2 Sweden 08:30 Swedbank/Silf PMI Services (Dec) -- 61.8 Events 10:30 Spain to Sell 0.45% 2022, 1.45% 2027, 2.9% 2046 and 1% I/L 2030 Bonds 10:50 France to Sell 0.75% 2028, 1.25% 2036 and 2% 2048 Bonds 19:30 Fed's Bullard Speaks at Economics Convention in Philadelphia

Calendar

Thursday, 04 January 2018

P. 5

10-year Close -1d 2-year Close -1d Stocks Close -1dUS 2,45 -0,02 US 1,93 0,01 DOW 24922,68 98,67DE 0,44 -0,03 DE -0,62 -0,01 NASDAQ 7065,531 58,63BE 0,66 -0,03 BE -0,52 -0,03 NIKKEI 23506,33 741,39UK 1,21 -0,07 UK 0,47 -0,03 DAX 12978,21 106,82

JP 0,06 0,01 JP -0,13 0,00 DJ euro-50 3509,88 19,69

IRS EUR USD GBP EUR -1d -2d USD -1d -2d3y 0,00 2,20 0,88 Eonia -0,3560 0,01405y 0,31 2,29 1,03 Euribor-1 -0,3680 0,0000 Libor-1 1,5618 0,000010y 0,89 2,43 1,28 Euribor-3 -0,3290 0,0000 Libor-3 1,6969 0,0000

Euribor-6 -0,2710 0,0000 Libor-6 1,8394 0,0000

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

EUR/USD 1,2015 -0,0044 EUR/JPY 135,17 -0,24 CRB 195,35 0,64USD/JPY 112,51 0,22 EUR/GBP 0,8890 0,0017 Gold 1318,50 2,40GBP/USD 1,3516 -0,0074 EUR/CHF 1,1739 0,0021 Brent 67,84 1,27AUD/USD 0,7836 0,0006 EUR/SEK 9,8235 -0,0257USD/CAD 1,2536 0,0024 EUR/NOK 9,7376 -0,0635

Brussels Research (KBC) Global Sales Force Mathias van der Jeugt +32 2 417 51 94 Brussels Peter Wuyts +32 2 417 32 35 Corporate Desk +32 2 417 45 82 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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