Friday, 13 May 2016

P. 1

Due to National Holiday, there will be no Sunrise on Monday 16th of May 2016. Next Sunrise will be published on Tuesday the 17th of May 2016.

Rates: Retail sales important gauge for sentiment

Risks for US retail sales are on the downside which is supportive for core bonds. We are eager to see how long a potential uptick will last. Yesterday, core bonds failed to profit from deteriorating risk sentiment. If they fail to profit from weaker US eco data, we would re-install short positions given that we are near important resistance levels.

Currencies: US consumer data to set the tone for USD trading

Yesterday, the dollar held up fairly well even as global sentiment on risk eased. Sterling hardly reacted as BoE’s Carney kept a balanced approach when presenting the BoE inflation report. Today, the US retail sales and consumer confidence are in the focus. A new set of weak data might put the dollar in the defensive.

Calendar

• US Equities ended mixed to slightly lower yesterday. The Nasdaq dropped 0.5%

as Apple shares dropped further due to renewed concerns about the outlook for iPhone sales. This morning, sentiment turned further risk-off is Asia. Chinese stocks outperform, trading mixed.

• In a written response to Congress, Fed Chairwoman Yellen said she didn’t completely rule out the use of negative interest rates in some future very adverse scenario, but added that policy makers would need to consider a wide range of issues before employing this tool, including the potential for unintended consequences.

• French President Hollande survived a no-confidence vote over plans to deregulate the labour market without a parliamentary vote. The French President faced however a wave of labour strikes and street protests in various cities across the country.

• Bank of Japan governor Kuroda said the central bank will act decisively to achieve its 2% inflation target, stressing that it still has ample policy options available if it were to expand stimulus again, but defended last month’s decision to hold off on further easing, saying there was more time needed to scrutinize the effects of previous measures.

• German economic growth accelerated sharply at the start of the year, picking up to 0.7% Q/Q from 0.3% Q/Q at the end of last year. The Statistics Office said positive impulses came mainly from domestic demand, while foreign trade was a drag on growth.

• Today, the focus will be on the US retail sales, while also the second estimate of euro zone Q1 GDP, US PPI inflation and University of Michigan consumer confidence will be released.

Headlines

S&P Eurostoxx50

Nikkei Oil

CRB Gold

2 yr US 10 yr US

2 yr EMU 10 yr EMU

EUR/USD USD/JPY

EUR/GBP

Friday, 13 May 2016

P. 2

Bund tests high, but falls off cliff on stronger stocks

Global core bonds lost ground on the back of strong intraday risk sentiment on European stock markets. The Bund tested the contract high shortly after a disappointing European equity market opening. A sustained break didn’t occur and the Bund fell off a cliff as equity markets started a strong intraday recovery. The Bund stabilized around noon and hovered listless sideways for the remainder of the session, ignoring a renewed decline in equities!! US weekly jobless claims unexpectedly jumped to the highest level of the past year, but US Treasuries fell instead of rising even despite falling equities. In a daily perspective, the German yield curve bear steepened with yields up to 3.3 bps higher (30-yr). The US yield curve bear flattened with yields 2.6 bps (2-yr) to 3.6 bps (5-yr) higher at the front end of the curve and 1.5 bps to 1.8 bps in the 10-to-30-yr sector. Fed speakers played a role.

Boston Fed Rosengren is quite hawkish given his natural dovish instincts and suggested that a Fed rate hike lurks around the corner without specifically pointing to the June FOMC meeting. “If the incoming eco data continue to be consistent with gradual improvement in labour markets and inflation getting closer to target, the Fed should be ready to gradually normalize rates.” He sees potential growth at 1.75% and expects Q2 growth to exceed that figure. Kansas Fed George, dissented already twice in favour of higher rates and repeated that “current rates are too low for today’s economic conditions.”. In a letter to Congressman Sherman, Fed chair Yellen didn’t rule out negative rates in a crisis, but it would only be used as a last resort.

All eyes on US retail sales

Following a poor Q1, US retail sales are forecast to have picked up at the start of Q2. The consensus is looking for a 0.8% M/M increase, boosted by stronger car sales. The control group is expected to show a more moderate 0.4% M/M gain. We see downside risks especially for the headline reading, but also for the control group. Consumer confidence has weakened further recently and wage growth slowed, while higher oil prices are weighing on consumers’ spending power. In the euro area, Q1 GDP is expected to be confirmed at a strong 0.6% Q/Q. Also in the US, PPI inflation is expected to pick up in April, becoming positive for the first time since December 2014.

Rates

US yield -1d2 0,754 0,02015 1,2186 0,012710 1,7275 -0,003430 2,5766 -0,0064

DE yield -1d2 -0,5060 0,00305 -0,3800 0,007010 0,1400 0,018030 0,8582 0,0293

Bund future (black) & oil price (orange) (intraday): Attempt to take out contract high (Bund) failed miserably. Decline equities ignored.

Brent oil still in nice uptrend, but now close to rally high. Can it take it out and steam to $50/b

US-Ger

Downside risks US retail sales and Michigan consumer confidence

Bund test highs, but fails miserably

German curve bear steepened while US curve bear flattened on “hawkish” Fed talk

Small narrowing peripheral spreads

Dove Rosengren sounds hawkish

Yellen doesn’t rule out negative rates as last resort

Friday, 13 May 2016

P. 3

Headline PPI is expected to pick up from -0.1% Y/Y to 0.2% Y/Y, boosted by higher energy prices. Core PPI however is expected to have slowed from 1.0% Y/Y to 0.9% Y/Y in April. We agree with the consensus. Finally, Michigan consumer confidence is expected to have improved slightly early May, rising from 89.0 to 89.5, but we continue to see downside risks as the labour market recovery might have slowed and higher gasoline prices might weigh.

US 30-yr Bond auction mixed

The US Treasury ended its mid-month refinancing operation with a tremendous $15B 30-yr Bond auction which didn’t go nearly as well as the prior two auctions this year. The auction stopped with a decent sized tail and the bid cover (2.19) was light. Bidding details showed decent indirect and dealer bids, but the direct bid was lacking.

Retail sales important for bond sentiment

R2 165 -1dR1 164,6BUND 163,93 -0,2900S1 161,46S2 160,81

Overnight, most Asian equity markets lose up to 1%. Brent crude remains close to, but below, key resistance in the $48-49/barrel region. The US Note future manages to eke out some gains, suggesting a good Bund opening.

Today’s eco calendar heats up in the US with retail sales and Michigan consumer confidence. Risks are on the downside of expectations which is supportive for US Treasuries/core bonds. We are eager to see how long a potential uptick will last. Yesterday, core bonds failed to profit from deteriorating risk sentiment on stock markets. If they fail to profit from weaker US eco data today, we would re-install short positions given that we are also near important resistance levels (Bund 164.6; T Note 131-14).

Technically, the Bund remains in the sideways channel between 160.81 and 164.60. In yield terms, 0.07% is key support for the German 10-yr yield. The US Note future trades in a similar range between 128-01+ and 131-14. Markets have priced in only one Fed rate hike for June 2017. Unless recession risks would rise, there is little scope for a more gradual rate path. Several more “dovish” governors already indicated that two rate hikes in 2016 are a realistic scenario.

German Bund: Neutral view (160.81 to 164.60). New sell-on-upticks around the upper bound

US Note future: Retail sales will be important gauge for sentiment. Failure to gain on weak figures would be signal to add short positions.

US-

Friday, 13 May 2016

P. 4

US retail sales to guide USD trading

On Thursday, USD trading remained technical in nature and confined to relatively tight ranges. Nevertheless, the dollar performed reasonably well given the lacklustre global sentiment. Disappointing US jobless claims had no lasting negative impact on the dollar. The dollar even (re)gained slightly ground later in the session as Fed governors kept the dollar open for a rate hike in the near future. EUR/USD closed the session near the intraday low at 1.1377 . USD/JPY held close to the 109 handle even as sentiment on the US equity markets deteriorated and finished the day at 109.02.

Overnight, most Asian equities trade again in negative territory, due to disappointing earnings across the region. Once again, the negative impact of declining equities on the dollar remains limited. USD/JPY trades only slightly below yesterday’s close, holding in the 108.80 area. EUR/USD is also little changed in the 1.1375 area. Moderately hawkish comments from the Fed helps to protect the downside of the dollar. The Aussie dollar maintains its downtrend as the momentum in the commodity complex eases and as investors contemplate to possibility of further RBA rate cuts. AUD/USD is testing the recent low in the 0.73 area.

Today, the euro area, Q1 GDP is expected to be confirmed at a strong 0.6% Q/Q. US retail sales are forecast to have picked up in April. The consensus is looking for a 0.8% M/M increase in the headline reading, boosted by stronger car sales. We believe that the risks remain for a downward surprise. Consumer confidence has weakened recently, wage growth slowed, while higher oil prices are weighing on consumers’ spending power. The US PPI inflation is expected to have picked up in April, becoming positive for the first time since December 2014. Core PPI however is expected to have slowed from 1.0% Y/Y to 0.9% Y/Y. We side with the consensus. Finally, Michigan consumer confidence is expected to have improved slightly early May, but we see downside risks. Recently, the link between the dollar and the developments on other markets was often diffuse. Both EUR/USD and USD/JPY stabilized or followed their own technical dynamics. Yesterday, the dollar performed rather well given a fragile equity sentiment. However, if US retail sales and consumer confidence disappoint (coming on the heels of a poor payrolls report), markets will question of the chance of a June or July rate hike, which will weigh on the dollar.

Currencies

R2 1,1714 -1dR1 1,1616EUR/USD 1,13615 -0,0054S1 1,1217S2 1,1144

EUR/USD off the recent highs, but no follow-through losses yet.

USD/JPY: rebound to slow?

USD holding stable despite fragile equity sentiment

Today, US retail sales/Michigan consumer confidence take center stage

Will the dollar resist poor consumer data?

Friday, 13 May 2016

P. 5

Technically, EUR/USD broke last week above the 1.1495 MT range top on broad-based USD weakness. This break was a technical warning for potential further dollar losses and opened the way for a retest of the key 1.1714 (2015 high). However, the USD decline petered out despite mixed US eco data and a poor US payrolls report. We maintain the view that the US economy is strong enough to allow the Fed to implement two rate hikes later this year. This is not discounted in the interest rate and FX markets. However, there is currently no trigger to kick-start a USD rally. The soft Fed approach, pockets of risk aversion and the Treasury report on currencies pushed USD/JPY to a new lows last week. Verbal Japanese interventions to stop the rise of the yen are likely to continue. We doubt they put the basis for a sustained USD/JPY rebound. We sell USD/JPY in case of a rebound to the recent highs (110/111 area) as we expect some fatigue in the global equity rally (return of risk-off?).

Sterling unmoved by BoE inflation report

On Thursday the focus for sterling trading was on the BoE policy decision and even more on the quarterly inflation report and press conference of governor Carney. The BoE as expected left its policy unchanged. There were no dissenters (9-0). They also maintained the assessment that the next rate move will probably be a rate hike. The BoE acknowledged the recent slowdown in growth, but the downward revision of the growth projection remained limited. Carney elaborated in extenso on the potential effects of Brexit on the economy, but didn’t draw any conclusions for current monetary policy. The BoE’s assessment was slightly less soft than we (and apparently also part of the market) expected. Sterling traded technically early in the session, but gained some ground after the BoE decision. EUR/GBP closed the session at 0.7873 (from 0.7908). The earlier gains of cable were reversed later in the session as the dollar rebounded. Cable finished the session little changed in the mid 1.44 area.

Today, only the UK construction output will be published. Another poor figure (-3.2% M/M and -2.7% Y/Y) is expected. We don’t have a good reason to take a different view from the consensus. If anything, the report might be slightly negative for sterling. However, both EUR/GBP and cable are currently confined to tight ranges.

The technical picture of EUR/GBP improved as the pair broke above the mid 0.79 area. A counter move occurred last month and threatened to deteriorate the picture. However the sterling rebound petered out. Weakening UK eco data and uncertainty on the referendum are negatives for sterling and this will stay so until the referendum on June 23. We think sterling will stay in the defensive. EUR/GBP might drift higher in the 0.7735/0.8117 range.

R2 0,8117 -1dR1 0,7993EUR/GBP 0,7871 -0,0036S1 0,7735S2 0,7652

EUR/GBP holds near the 0.79 level

GBP/USD: correction slows, for now

Friday, 13 May 2016

P. 6

Friday, 13 May Consensus Previous US 14:30 Retail Sales Advance MoM (Apr) 0.8% -0.3% 14:30 Retail Sales Ex Auto and Gas (Apr) 0.3% 0.1% 14:30 Retail Sales Control Group (Apr) 0.4% 0.1% 14:30 PPI Final Demand MoM YoY (Apr) 0.3% / 0.2% -0.1%/-0.1% 14:30 PPI Ex Food and Energy MoM (Apr) 0.1% / 0.9% -0.1% / 1.0% 16:00 Business Inventories (Mar) 0.2% -0.1% 16:00 U. of Mich. Sentiment (May P) 89.5 89.0 16:00 U. of Mich. 1 Yr Inflation (May P) -- 2.8% 16:00 U. of Mich. 5-10 Yr Inflation (May P) -- 2.5% Japan 01:50 Money Stock M2 YoY (Apr) A 3.3% 3.2% 01:50 Money Stock M3 YoY (Apr) A 2.7% 2.6% UK 10:30 Construction Output MoM YoY (Mar) -3.2%/ -2.7% -0.3% / 0.3% EMU 08:00 EU27 New Car Registrations (Apr) A 9.1% 6.0% 11:00 GDP SA QoQ YoY (1Q P) 0.6% / 1.6% 0.6% / 1.6% Germany 08:00 CPI EU Harmonized MoM YoY (Apr F) A-0.5%/-0.3% -0.3%/-0.1% 08:00 GDP SA QoQ YoY (1Q P) A 0.7%/1.6% 0.3% / 1.3% France 08:45 Wages QoQ (1Q P) -- 0.1% 08:45 Non-Farm Payrolls QoQ (1Q P) 0.2% 0.2% Italy 10:00 GDP QoQ YoY (1Q P) 0.3% / 0.9% 0.1% / 1.0% 11:00 CPI EU Harmonized YoY (Apr F) -0.3% -0.3% Spain 09:00 CPI Core MoM YoY (Apr) -- 0.6% / 1.1% 09:00 CPI EU Harmonised MoM YoY (Apr F) 0.4% / -1.2% 0.4% / -1.2% Greece 11:00 GDP QoQ YoY (1Q A ) -0.4%/-1.2% 0.1%/-0.7% Events 11:00 BoE releases text of a Speech by Chief Economist Haldane 14:30 BoE Policy Maker Martin Weale Speaks in Liverpool 22:00 Fed's Williams Speaks in Sacramento

Calendar

Friday, 13 May 2016

P. 7

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 Joke Mertens +32 2 417 30 59 Institutional Desk +32 2 417 46 25 Mathias van der Jeugt +32 2 417 51 94 France +32 2 417 32 65 Dublin Research London +44 207 256 4848 Austin Hughes +353 1 664 6889 Singapore +65 533 34 10 Shawn Britton +353 1 664 6892 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 ON WWW.KBCCORPORATES.COM/RESEARCH 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.

Contacts

10-year td - 1d 2 -year td - 1d STOCKS - 1dUS 1,73 -0,01 US 0,75 0,02 DOW 17721 17720,50DE 0,14 0,02 DE -0,51 0,00 NASDAQ for Exch - NQI #VALUE!BE 0,54 0,01 BE -0,47 -0,01 NIKKEI 16412 16412,21UK 1,40 0,01 UK 0,37 0,01 DAX 9862,12 9862,12JP -0,11 0,00 JP -0,25 0,00 DJ euro-50 2935 2935,46

USD td -1dIRS EUR USD (3M) GBP EUR -1d -2d Eonia EUR -0,342 -0,0073y -0,131 0,970 0,849 Euribor-1 -0,35 0,00 Libor-1 USD 0,51 0,515y 0,007 1,165 1,008 Euribor-3 -0,26 0,00 Libor-3 USD 0,59 0,5910y 0,539 1,575 1,434 Euribor-6 -0,14 0,00 Libor-6 USD 0,73 0,73

Currencies - 1d Currencies - 1d Commoditie CRB GOLD BRENTEUR/USD 1,13655 -0,0051 EUR/JPY 123,59 -0,69 183,6463 1273,74 47,81USD/JPY 108,76 -0,12 EUR/GBP 0,7872 -0,0035 - 1d 0,31 1,44 0,34GBP/USD 1,4429 -0,0002 EUR/CHF 1,1042 -0,0049AUD/USD 0,7294 -0,0039 EUR/SEK 9,3133 0,03USD/CAD 1,2851 0,0000 EUR/NOK 9,2515 -0,07