Tuesday, 15 May 2018

P. 1

Rates: US 10-yr yield returns north of 3%

Core bonds lost ground yesterday with German Bunds underperforming. Inflation expectations rise further. The US 10-yr yield trades back above 3%. Attracted by key resistance at 3.07%, we think the sell-off could continue against the back of strong expected US eco data and probably relatively hawkish Fed comments.

Currencies: Will US retail sales be strong enough to revive USD rebound?

EUR/USD rebounded close to 1.20 yesterday, but the test was rejected. The focus turns to the US April retail sales today. After last week’s ‘soft’ US CPI, a good report is probably needed to keep the USD rally alive. For now, geopolitical tensions apparently are supporting the dollar more than the euro. Sterling traders will keep a close eye at the UK wage growth data.

Calendar

• US stock markets opened strong, but trimmed gains as US rates and the dollar

were upwardly oriented during US dealings. Asian bourses face some selling pressure this morning with India outperforming.

• The US and China are “still very far apart” on disputes over trade, technology, and market access, the US ambassador to China said, managing expectations ahead of a visit to Washington by a senior Chinese envoy. (FT)

• China reported weaker-than-expected investment (7% Y/Y) and retail sales (9.4% Y/Y) in April and a drop in home sales, clouding its economic outlook. Industrial production (7% Y/Y) was this morning’s bright spot. (Reuters)

• The IMF has sounded a fresh warning about Ireland’s surging property market, saying residential prices appear “modestly overvalued” by some measures. They also called for “close attention” to the upswing in Irish commercial property. (FT)

• Turkish President Erdogan said he intends to tighten his grip on the economy and take more responsibility for monetary policy if he wins an election next month. EUR/TRY set a new all-time high above 5.20. (BB)

• The EU warned Britain time was running out to seal a Brexit deal this autumn and ensure London does not crash out of the bloc next March, adding to pressure on PM May. (Reuters)

• Today’s eco calendar contains US retail sales, Empire manufacturing, the UK labour market report, German ZEW-survey, 2nd reading of Q1 EMU GDP and several Fed speakers.

Headlines

S&PEurostoxx 50NikkeiOilCRB

Gold2 yr US10 yr US

2yr DE10 yr DEEUR/USDUSD/JPYEUR/GBP

Tuesday, 15 May 2018

P. 2

Core bonds face new selling pressure

Global core bonds sold off yesterday with German Bunds underperforming US Treasuries. Rising EMU inflation expectations (new German wage deal), comments by ECB Villeroy (1st hike will be quarters, not years after ending APP) and new highs for the oil price (Israel conflict) were at play. German yields increased by 2.1 bps (2-yr) to 5.2 bps (10-yr) on a daily basis. Changes on the US yield curve ranged between +1.2 bps (2-yr) and +3.2 bps (10-yr). The US 10-yr yield moved back above the psychological 3% barrier. 10-yr yield spread changes vs Germany ranges between +1 bp (Spain/Italy) and -3 bps (Greece). Last week’s BTP underperformance already grinds to a halt despite the populist 5SM/Lega coalition which is shaping up.

Asian risk sentiment is slightly negative overnight. Rather soft Chinese eco data and comments by the US ambassador to China are probably at play. The latter warned that the US and China remain very wide apart on trade, downplaying expectations ahead of three days of negotiations. Chinese vice-premier and top economic advisor Liu He arrives in Washington today. The US Note future remains under selling pressure. We expect a weaker opening for the Bund.

Today’s eco calendar heats up. Headline US retail sales (April) are expected at 0.3% M/M, but core figures should be stronger (energy effect). We think that the report will at least meet the consensus bar with effect of US tax reform gradually filtering through. It could give Q2 GDP expectations momentum, erasing the Q1 growth dip. A small pullback in the Empire Manufacturing Survey (May) is forecast, but the indicator should remain well above its long term average. Fed Williams and Kaplan are scheduled to speak. Williams’ view gains importance as he takes over on the helm of the NY Fed in June. He favours 3 or 4 rate hikes this year. Will he further ruffle his hawkish feathers? Kaplan speaks at an oil conference. Overall, we think that this mix of data and Fed speakers could extend the core bond sell-off with the US 10-yr yield technically attracted by key resistance levels (3.07%). Geopolitical risk is a wildcard.

EMU eco data include German ZEW investor confidence and details of Q1 GDP. The ZEW is often closely linked to the stock market performance. The Dax’s rebound since early April suggests an end to the indicators decline since the start of the year (both headline and expectations). Technically, The German 10-yr yield bounced off key support levels (0.46%/0.48%), suggesting a return higher in the range with upper bound at 0.80%. ECB Draghi, Coeuré and Praet speak in Frankfurt tomorrow. Will they give more insight in the central bank’s normalization process like Villeroy yesterday?

Rates

US yield -1d2 2,55 0,015 2,87 0,0210 3,00 0,0330 3,15 0,03

DE yield -1d2 -0,56 0,025 0,00 0,0510 0,61 0,0530 1,29 0,04

German 10-yr yield moves higher in consolidation range

US 10-yr yield returned north of 3%. Key resistance stands at 3.07%

Af

Tuesday, 15 May 2018

P. 3

EUR/USD rebound blocked near 1.20. Focus turns to US retail sales

EUR/GBP: will solid wage data support a further sterling

rebound?

Will US retail sales revive USD rebound?

The USD decline since last week’s US CPI initially continued yesterday. The trade-weighted dollar drifted south. Some euro strength was also in play. ECB‘s Villeroy indicated that APP will probably halt this year and it won’t take ‘years’ for the ECB to raise rates after APP. LT interest rate differentials narrowed in favour of the euro. EUR/USD came close to the 1.20 area, but the rally ran into resistance and gains couldn’t be sustained. The pair even closed the day with a small loss at 1.1926. At the same time USD/JPY remained well bid (close at 109.66). So, in the end, the dollar showed quite resilient despite some intraday gyrations.

Asian equities mostly trade with modest losses overnight. The oil price continues to push higher with Brent above $78/barrel. The US 10-y yield regained the 3.0% barrier. Geopolitical tensions in the Middle East and higher US yields for now tilt the balance again in favour of the dollar. USD/JPY is nearing the 110 mark. EUR/USD also trades with a slightly negative bias (1.1920 area).

Today, the EMU and German Q1 GDP and German ZEW sentiment will be published. Yesterday’s price action shows that the euro is not immune for EMU news. However, the focus for FX trading will probably turn to the US retail sales. Last week’s ‘soft’ US CPI suggests that negative news might make the market more cautious on the scenario of four Fed rate hikes this year. So, the USD probably at least needs an in-line outcome to resume its recent rebound. At the same time, the USD shows good resilience given the rise in the oil price. We also have the impression that the USD profits more from (geopolitical) uncertainty than the euro. Yesterday, we indicated that we didn’t see a trigger for a big USD decline yet. We hold on to that view even as multiple conflicting factors are in play. Yesterday’s rejected test of EUR/USD 1.20 and the solid rise in USD/JPY might give USD bulls some comfort. The 1.1823 correction low is the first reference in EUR/USD ahead of 1.1718.

UK labour data will be released today and the government will again meet on Brexit. UK job growth is expected solid and earnings (ex-bonus) are expected to rise to 2.9% Y/Y. Meeting the consensus could lift the probability of an August rate hike again. After last week’s BoE decision, the EUR/GBP rebound halted near 0.8850. Some modest sterling gains are possible in case of a decent labour report. However, we don’t expect a sustained GBP rally yet.

Currencies

R2 1,2598 -1dR1 1,2555EUR/USD 1,1927 -0,0016S1 1,1812S2 1,1718

R2 0,9307 -1dR1 0,9033EUR/GBP 0,8799 -0,0019S1 0,8627S2 0,8541

Tuesday, 15 May 2018

P. 4

Tuesday, 15 May Consensus Previous US 14:30 Empire Manufacturing (May) 15.0 15.8 14:30 Retail Sales Advance MoM (Apr) 0.3% 0.6% 14:30 Retail Sales Ex Auto MoM (Apr) 0.5% 0.2% 14:30 Retail Sales Ex Auto and Gas (Apr) 0.4% 0.3% 14:30 Retail Sales Control Group (Apr) 0.4% 0.4% 16:00 Business Inventories (Mar) 0.1% 0.6% 16:00 NAHB Housing Market Index (May) 69 69 UK 10:30 Claimant Count Rate (Apr) -- 2.4% 10:30 Jobless Claims Change (Apr) -- 11.6k 10:30 Average Weekly Earnings 3M/YoY (Mar) 2.6% 2.8% 10:30 Weekly Earnings ex Bonus 3M/YoY (Mar) 2.9% 2.8% 10:30 ILO Unemployment Rate 3Mths (Mar) 4.2% 4.2% 10:30 Employment Change 3M/3M (Mar) 125k 55k EMU 11:00 Industrial Production SA MoM/WDA YoY (Mar) 0.7%/3.6% -0.8%/2.9% 11:00 GDP SA QoQ/YoY (1Q P) 0.4%/2.5% 0.4%/2.5% 11:00 ZEW Survey Expectations (May) -- 1.9 Germany 08:00 GDP SA QoQ/WDA YoY (1Q P) 0.4%/2.4% 0.6%/2.9% 11:00 ZEW Survey Current Situation (May) 85.5 87.9 11:00 ZEW Survey Expectations (May) -8.2 -8.2 France 08:45 Wages QoQ (1Q P) -- 0.2% 08:45 CPI EU Harmonized MoM/YoY (Apr F) 0.1%/1.8% 0.1%/1.8% China 04:00 Surveyed Jobless Rate (Apr) 4.9% A 5.1% 04:00 Retail Sales YTD/YoY (Apr) 9.7%/9.4% A 9.8%/10.1% 04:00 Industrial Production YTD/YoY (Apr) 6.7%/7.0% A 6.8%/6.0% 04:00 Fixed Assets Ex Rural YTD YoY (Apr) 7.0% A 7.5% Norway 08:00 Trade Balance NOK (Apr) -- 15.0b 08:00 GDP Mainland/Total QoQ (1Q) 0.5%/-- 0.6%/-0.3% Events 03:30 RBA May Meeting Minutes 14:00 Fed’s Kaplan discusses Outlook for Energy Market, Economy 16:00 Fed Nominees Clarida and Bowman Testify Before Senate Panel 19:00 Fed’s Williams to Speak at Economic Club of Minnesota

Calendar

Tuesday, 15 May 2018

P. 5

10-year Close -1d 2-year Close -1d Stocks Close -1dUS 3,00 0,03 US 2,55 0,01 DOW 24899,41 68,24DE 0,61 0,05 DE -0,56 0,02 NASDAQ 7411,315 8,43BE 0,87 0,04 BE -0,47 0,02 NIKKEI 22818,02 -47,84UK 1,47 0,03 UK 0,81 0,02 DAX 12977,71 -23,53

JP 0,06 0,01 JP -0,13 0,00 DJ euro-50 3565,74 0,22

IRS EUR USD GBP EUR -1d -2d USD -1d -2d3y 0,06 2,86 1,18 Eonia -0,3600 0,00105y 0,43 2,95 1,37 Euribor-1 -0,3710 0,0000 Libor-1 1,9187 0,000010y 1,04 3,03 1,62 Euribor-3 -0,3260 0,0010 Libor-3 2,3425 0,0000

Euribor-6 -0,2710 0,0000 Libor-6 2,5150 0,0000

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

EUR/USD 1,1927 -0,0016 EUR/JPY 130,79 0,16 CRB 203,83 0,27USD/JPY 109,66 0,27 EUR/GBP 0,8799 -0,0019 Gold 1318,20 -2,50GBP/USD 1,3556 0,0014 EUR/CHF 1,1933 -0,0015 Brent 78,23 1,11AUD/USD 0,7526 -0,0017 EUR/SEK 10,3081 0,0336USD/CAD 1,2813 0,0018 EUR/NOK 9,5809 0,0226

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Rates: US 10-yr yield returns north of 3%Currencies: Will US retail sales be strong enough to revive USD rebound?Calendar