Thursday, 02 November 2017

P. 1

Rates: Core bonds little moved after Fed meeting.

The FOMC statement upgraded the economic situation to “solid” from “moderate” confirming its intention to raise rates in December. Today, Trump’s announcement of the nomination of Mr. Powell as next Fed chair and the BoE rate hike will be the focus, but as these events are largely anticipation, the effect on core bonds should be modest ahead of the US payrolls.

Currencies: Dollar fails to extend gains

The dollar was better bid at the end of last week, but for now there are no follow-through gains. Today’s eco data are no market movers for the dollar. A cautious risk-off sentiment and ‘political issues’ might keep USD bulls on the sidelines ahead of tomorrow’s US payrolls. EUR/GBP is testing key support as the BoE is largely expected to raise its policy rate today.

Calendar

• US equity indices ended narrowly mixed yesterday as strong opening gains

gradually evaporated. Asian equities trade with modest losses overnight except for Japan that goes up about 0.5%.

• Jay Powell is expected to be the US president’s nominee to serve as the next chair of the Fed, according to two White House officials. An official announcement is expected today.

• The BOE is set to increase rates for the first time in a decade. Mark Carney may signal even more tightening if the economy performs in line with new forecasts, but that's unlikely.

• The Fed reinforced expectations for a December rate hike. FOMC officials upgraded the economic activity to solid from moderate previously. It confirmed they expect inflation to eventually reach the 2% target.

• The House GOP tax bill expected today will impose a one-time tax of 12% on U.S. firms' offshore cash earnings. Tax writers also plan to phase out the 20% proposed corporate rate after a decade. Other measures include removing estate tax and restrictions on certain tax deductions.

• Australian dollar rallies the most in three weeks as trade and building data for September beat estimates. AUD/USD jumps again above the 0.77 handle.

• US and EMU eco data are unlikely to have much market impact, but the BoE meeting and Trump’s Fed announcement will be highlights. Corporate earnings reports out today include Apple, Alibaba, Hugo Boss, Royal Dutch Shell, Credit Suisse and L’Oreal. Spain and France tap the bond market.

Headlines

S&PEurostoxx 50NikkeiOilCRB

Gold2 yr US10 yr US

2yr DE10 yr DEEUR/USDUSD/JPYEUR/GBP

Thursday, 02 November 2017

P. 2

Fed renews suggestion of December hike. Core bonds had a calm trading session, as the outcome of the FOMC meeting was awaited late in the session. No rate hike was expected, but the text of the press release supported the view the Fed will hike rates again in December. The statement wasn’t much different from the September one. It was, if anything, slightly more hawkish because it characterized economic growth as “solid” rather than “moderate”. The reaction after the press release was modest though. We retain that US economic data like ISM business confidence and ADP employment report were strong, the former slightly below and the latter slightly above expectations. EMU eco data were unimportant and the holiday in many European countries kept investors at bay.

In a daily perspective, the US curve flattened with 2-yr yields up 1.2 bp and 30-yr yields down 2.1 bps. The bear flattening occurred ahead of the FOMC, likely due to the announcement the US Treasury would keep the amounts at the refunding auctions unchanged (despite the start of the Fed balance sheet tapering) and maybe some late positioning for a Fed confirmation it would likely hike rates in December. Chances on such a move increased to 92%, virtually completely discounting such a rate hike. Chances for an extra March 2018 rate hike stand at 42%. The German curve steepened with yield increases minimal going from flat (2-yr) to 1.5 bps higher. On the intra-EMU bond market, spreads were little changed except for Greece that saw 10-yr yield spreads fall sharply on rumours the government plans a huge debt swap.

BoE in focus today The EMU eco calendar contains only the final manufacturing PMI report, that usually leaves the preliminary figure intact or changes it insignificantly. German unemployment data are no market mover. In the US, the weekly initial jobless claims and the Q3 productivity figures are up for release. Productivity will show a stronger outcome in Q3, as strong GDP growth was accompanied by weak employment growth (hurricane-related). It isn’t a market driver though and we expect US data to have no lasting impact on trading. The BoE meeting is important. The Market expects a 25 bps increase of the Bank rate. Such a decision is nearly completely discounted (90% chance + unanimity by the forecasters). Unless the BoE would suggest that the rate increase is the start of a rate cycle, which is unlikely given the global low inflation readings and the currency-driven and thus temporary UK inflation surge, the reaction on the UK interest rate markets should be limited. So, gilts won’t contaminate German Bunds or US Treasuries for long. The shadow of the US payrolls report to be released tomorrow is another reason to expect little carryover of an eventual gilt decline on Bunds and US Treasuries

Rates

US yield -1d2 1.61 0.015 2.01 0.0010 2.37 -0.0130 2.85 -0.02

DE yield -1d2 -0.75 0.005 -0.34 0.0110 0.37 0.0130 1.25 0.02

US Note future (black) & S&P future (orange) (intraday): Rather uneventful session. Initially waiting for Fed, later on seeing they keep

their intention to raise rates in December.

Brent oil & 5-yr/5yr rate expectations. The correlation weakened. The latest run-up in oil prices only kept inflation expectations stable.

Aff

Eco calendar unattractive

BoE rate hike largely discounted

Global core bonds little moved after Fed press release.

Likelihood of Dec Fed hike 90%.

Greece spread narrows sharply after rumours about debt swap.

Thursday, 02 November 2017

P. 3

Sideways trading today?

Asian stock markets trade modestly lower overnight with the exception of Japan that outperforms. The dollar is under modest downward pressure and the US Treasuries are somewhat higher, which might still be due to the expected announcement of the nomination of (dove) Powell for next Fed chair. The Bund opened marginally higher too.

Today’s eco calendar is unattractive (see higher) and unlikely to give core bond markets much impetus. We think that a BOE rate hike and the Powell nomination are largely discounted. Unless the BoE suggests that the rate hike is the start of a (small) rate cycle or Trump suddenly nominates John Taylor instead of Powell, unlikely events, core bonds should trade quietly. If there are surprises it would be negative for core bonds. Technically, the Bund picture is interesting. The 162.78 previous top played its resistance in past days. A final push towards 163.40 cannot be excluded, but the recent rebound might have stalled.

US yields (10-yr & 30-yr) failed to close above key resistance levels last week, triggering some technically inspired bond buying. The US payrolls are likely the next major event, unless the House tax bill brings surprises. Technically, there is still some room for US yields to decline, but we become suspicious about the scope to do so. We nevertheless hold an upward bias for core bonds this week with a potential outperformance of the US Note future.

R2 163.43 -1dR1 162.78BUND 162.54 -0.12S1 160.49S2 159.80

German Bund: once post-ECB rebound runs out of steam, it could be an opportunity to enter new short positions. We might have reached

interesting entry levels

US Note future: bottoming out after failed test key support Sell-on-upticks near 125-25+

Thursday, 02 November 2017

P. 4

EUR/USD broke below 1.1662 support, but breaks still needs to be

confirmed .

USD/JPY Key resistance tested twice, but no break occurred.

USD fails to extend gains

On Wednesday, the dollar traded with a cautiously positive bias. The US eco data (ADP, ISM) were OK but close to expectations. The Fed left its policy unchanged. It kept a positive assessment on the economy, leaving the door open for a December rate hike. ‘Political issues’ were a source of caution for USD bulls. Markets are pondering the impact of president Trump likely nomination of Mr. Powell as next Fed chairman. There is also a lot of uncertainty on the new tax bill. EUR/USD finished session at 1.1619 (from 1.1646). USD/JPY finished at 114.19 (from 113.64) but the key 114.45 area stays out of reach.

Overnight, Asian equities outside Japan mostly trade with modest losses. The US equity rally shows signs of fatigue. This weighs on Asian indices and on US yields. It also prevents the dollar to return to the recent highs against the euro and the yen. USD/JPY returned below the 114 handle while EUR/USD trades again in the mid 1.16 area. The Aussie dollar regained some ground after last week’s setback supported by stronger than expected eco data. AUD/USD regained the 0.77 mark.

Politics rather than data to guide USD trading.

The EMU eco calendar contains only the final manufacturing PMI report and the German unemployment data, no market movers. In the US, the weekly initial jobless claims and the Q3 productivity figures are up for release. US president Trump is expected to nominate Jerome Powell as the next Fed Chairman. Markets also continue to look forward to additional details on the Tax reform plans. The proposition of tax cuts as such is a USD positive, but markets also want details on how these cuts will be funded. A lack of details on this issue might cap any further USD enthusiasm. Markets will also look forward to tomorrow’s US payrolls.

The dollar made a new up-leg at the end of last week. The move was partially a repositioning out of the euro after a soft ECB assessment. At the same time, the US data/news flow as was also USD supportive. The dollar maintained those gains this week, but there were no additional gains. Today, we keep a neutral to cautiously negative bias on the dollar. The data won’t help and a cautious risk-off sentiment, recently often weighed more on US yields than on European ones. USD investors will look forward to tomorrow’s US payrolls. LT we maintain a cautious EUR/USD sell-on-upticks bias. Of late, the dollar failed to gain against the euro despite widening interest rate differentials since early September. This trading dynamic was broken after the ECB decision last week.

Currencies

R2 1.2225 -1dR1 1.2167EUR/USD 1.1619 -0.0027S1 1.1511S2 1.1331

No follow-through gains for dollar, but

trades still near ST highs.

Dollar cedes slightly ground overnight

Eco data probably won’t affect USD trading

US tax bill, risk sentiment and the nomination of the next Fed Chair are wild cards

Thursday, 02 November 2017

P. 5

Policy divergence between the ECB and the Fed is again on the radar. However, any additional rate support for the dollar will probably be modest near term, especially if Powell is nominated to succeed Yellen. So, further EUR/USD decline might develop gradually.

From a technical point of view, EUR/USD dropped below 1.1670/62 support, but there are no convincing follow-through gains yet. If the break is confirmed, it would signal that the recent EUR/USD uptrend is broken. EUR/USD 1.1423 (38% retracement of 2017 rise) is the next downside target on the charts. USD/JPY’s momentum was positive in September. The pair regained 110.67/95 resistance, a positive. The 114.49 correction top is the next resistance. Sentiment improved last week, but the first test on Friday failed. We don’t preposition for a sustained break higher.

Sterling tests 0.8740/50 support ahead of BoE

Yesterday, sterling made some intraday swings against the euro, but at the end of the day the changes were limited. The UK eco data, including the UK manufacturing PMI, came out slightly stronger than expected. EUR/GBP touched a minor correction low after the report. However, a sustained break below 0.8743 support didn’t occur. EUR/GBP finished the session at 0.8772; hardly changed from Tuesday. Cable finished the session at 1.3245 (from 1.3283).

Today, the UK construction PMI sis expected to rebound slightly from 48.1 to 48.5. However, the focus will be on the BoE policy decision and on the UK inflation report. The BoE is largely expected to raise rates by 25 basis points to 0.50%. Markets will keep a close eye at growth and inflation projections in the inflation report, looking for clues on additional rate hikes next year. Carney and Co will keep this option open. However, we doubt that there is room for a further rate hike anytime soon as long as the uncertainty on Brexit persists. In this context, we assume that there is a lot of good news discounted for sterling of late.

EUR/GBP staged a strong uptrend from April till late August with a top at 0.9307. Rising UK inflation and the BoE preparing markets for a rate hike caused a sterling rebound. This rebound did run into resistance. EUR/GBP tried to regain the 0.890.90 area, but there were no follow-through gains. The drop below the 0.8855 area (neckline minor double top) on Friday opened the way for a return to 0.8743 or even 0.8652 supports. The jury is still out, but we maintain the working hypotheses that this area will be tough to break in a sustainable way.

R2 0.9415 -1dR1 0.9307EUR/GBP 0.8772 0.0005S1 0.8743S2 0.8657

EUR/GBP: testing first important support at 0.8743 ahead of the BoE decision

GBP/USD short term consolidation continues

Thursday, 02 November 2017

P. 6

Thursday, 2 November Consensus Previous US 12:30 Challenger Job Cuts YoY (Oct) -- -27.0% 13:30 Initial Jobless Claims 235K 233k 13:30 Continuing Claims 1894K 1893k 13:30 Nonfarm Productivity (3Q P) 2.6% 1.5% 13:30 Unit Labor Costs (3Q P) 0.4% 0.2% Japan 06:00 Consumer Confidence Index (Oct) 43.6 43.9 UK 10:30 Markit/CIPS UK Construction PMI (Oct) 48.5 48.1 13:00 Bank of England Bank Rate 0.500% 0.250% 13:00 BOE Asset Purchase Target (Nov) 435b 435b 13:00 BOE Corporate Bond Target (Nov) 10b 10b EMU 10:00 Markit Eurozone Manufacturing PMI (Oct F) 58.6 58.6 Germany 09:55 Unemployment Change (000's) (Oct) -10k -23k 09:55 Unemployment Claims Rate SA (Oct) 5.6% 5.6% 09:55 Markit/BME Germany Manufacturing PMI (Oct F) 60.5 60.5 France 09:50 Markit France Manufacturing PMI (Oct F) 56.7 56.7 Italy 09:45 Markit/ADACI Italy Manufacturing PMI (Oct) 56.5 56.3 Spain 09:15 Markit Spain Manufacturing PMI (Oct) 54.8- 54.3 Events 10:30 Spain to Sell Bonds (0.45% 2022, 1.45% 2027, 4.9% 2040 & 0.65% IL 2027bonds) 10:50 France to Sell 0.75% 2028, 1.5% 2031 & 2% 2048 Bonds 13:00 Bank of England Inflation Report 13:30 Fed's Powell & Dudley Speaks at Alternative Reference Rates Event 23:15 Fed's Bostic Speaks in Chicago about Government Statistics

Calendar

Thursday, 02 November 2017

P. 7

10-year Close -1d 2-year td -1d Stocks Close -1dUS 2.37 -0.01 US 1.61 0.01 DOW 23435.01 57.77DE 0.37 0.01 DE -0.75 0.00 NASDAQ 6716.533 -11.14BE 0.61 0.01 BE -0.62 0.01 NIKKEI 22539.12 119.04UK 1.34 0.01 UK 0.49 0.03 DAX 13465.51 235.94

JP 0.06 -0.01 JP -0.16 -0.01 DJ euro-50 3697.4 23.45

IRS EUR USD GBP EUR -1d -2d USD -1d -2d3y -0.07 1.94 0.99 Eonia -0.3500 -0.00205y 0.21 2.09 1.14 Euribor-1 -0.3710 0.0010 Libor-1 1.2433 0.000010y 0.85 2.35 1.39 Euribor-3 -0.3290 0.0020 Libor-3 1.3812 0.0000

Euribor-6 -0.2760 0.0000 Libor-6 1.5751 0.0000

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

EUR/USD 1.1619 -0.0027 EUR/JPY 132.68 0.34 CRB 187.94 0.38USD/JPY 114.18 0.54 EUR/GBP 0.8772 0.0005 Gold 1277.30 6.80GBP/USD 1.3245 -0.0038 EUR/CHF 1.1657 0.0039 Brent 60.49 -0.45AUD/USD 0.7676 0.0020 EUR/SEK 9.7613 0.0050USD/CAD 1.2865 -0.0023 EUR/NOK 9.4695 -0.0439

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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