Friday, 03 November 2017

P. 1

Rates: Payrolls unable to give US Treasuries firm direction?

The outcome of the payrolls is highly uncertain. We see risks for a strong report. However, a Treasury sell-off won’t trigger a relevant break of key support. Similarly, key resistance looks to tough to break in case of a weak report. We envisage a sell-on-upticks in the latter case.

Currencies: Will payrolls be strong enough to inspire further USD gains?

Yesterday, the formal nomination of Jerome Powell as Fed Chairman and a proposal on US tax reforms were not able to give the dollar clear directional guidance. Today, the focus is on the US payrolls. We expect a strong report. A positive surprise in average hourly earnings is probably needed to support further USD gains.

Calendar

• US equities ended the session nearly unchanged with the Dow outperforming

after recouping early losses (on tax plan). Asian shares trade mixed with Japanese markets closed for a holiday. China underperforms.

• House Republican leaders rolled out their sweeping tax plan. The proposal cuts the corporate rate to 20%, reduces the number of individual brackets and eliminates the estate tax. It also halves the cap on the popular mortgage-interest deduction on new home sales and imposes a levy of up to 12% on offshore earnings. Trump said the bill will be law by Christmas.

• Brent headed for a fourth weekly gain, with the Saudi and Russian energy ministers possibly meeting in Uzbekistan to discuss oil-output cuts. Brent trades currently at $60.86/barrel.

• Venezuela is restructuring its global debt. President Maduro said PDVSA will make one last $1.1 billion payment before negotiating with banks and investors. Risk of contagion seems limited. Mexican peso was little changed in Asia.

• Apple forecasts record sales tied to robust demand for the iPhone X. It will help generate as much as $87 bn. in the Dec. quarter. Tim Cook said production which has had problems was "going well" and initial demand is strong."

• Mr.Powell pledged to pursue the Fed's goals of stable prices and maximum unemployment while keeping an eye on financial market risks. Trump officially named him to succeed Janet Yellen as Fed chairman.

• Chinese Caixin-Markit services PMI rose to 51.2 in October, up from 50.6 previously. New business growth was modest while business expectations picked up slightly.

• The market calendar will be dominated by the US payrolls. Minor items are the UK services PMI and speeches of ECB Nowotny & Coeuré and Fed Kashkari.

Headlines

S&PEurostoxx 50NikkeiOilCRB

Gold2 yr US10 yr US

2yr DE10 yr DEEUR/USDUSD/JPYEUR/GBP

Friday, 03 November 2017

P. 2

US yields curve flattens modestly on supply issue.

Global core bonds had a quiet session. Bunds ended unchanged on the day. US Treasuries eked out modest gains with a flattening of the curve, but gains were technically irrelevant ahead of today’s US payrolls. During the European session, bonds traded with a minor negative bias but without a particular driver. Eco data were near expectations and ignored. During the US session, core bonds traded with a positive bias, which allowed the Bund to regain the losses and the US Treasuries to gain some ground. Eco data were once more ignored. There might have been some effect from surging gilts after the (dovish) BoE rate hike (see Sunset report). The Treasury borrowing advisory Committee agreed that the increased borrowing would be concentrated in the 2-to-5 year sector, which continued the flattening of the curve. The release of the Republican tax plan pushed US Treasuries initially higher, as equities tanked, but the moves were soon undone. The plan affected trading of various equity sectors, but turned out to be neutral for US Treasuries. The official nomination of Jerome Powell for next Fed chair had no impact anymore as it was telegraphed. In a daily perspective, the German yield curve was virtually unchanged, while the US curve bull flattened with yields down by 0.4 bp (2-yr) to 3.2 bps (30-yr). On intra-EMU bond markets, 10-yr yield spreads versus Germany were little changed with Greece the noticeable exception, as it profited from rumours on a rate swap that should enhance liquidity (-18 bps).

US payrolls main driver of markets today

The US October payrolls report will dominate trading. However, after a hurricane-induced distorted September report, the uncertainties about the October report are still bigger than usual. How large is the bounce? Consensus expects payrolls’ growth of 323K following a net decline of 33K in September, but the range of estimates is very wide (120K to 400K). The forward looking pointers for the payrolls remained constructive. Therefore, we side with the consensus. The unemployment rate is expected to have stabilized at 4.2% (after a strange 0.2%-point fall in September). The decline in September is a bit suspicious as the household employment rose by an outsized 906K. Therefore, we see risks on the upside. The range of estimates is also very wide: 4.1% to 4.4%. Maybe the most important element of the report are the average hourly earnings, an imperfect gauge of wage growth. In the Fed’s view of the economy, tight labour market conditions push up wages, which stimulates inflation.

Rates

US yield -1d2 1.61 0.005 2.00 -0.0210 2.35 -0.0330 2.83 -0.03

DE yield -1d2 -0.75 0.005 -0.35 0.0010 0.37 0.0030 1.24 0.00

US Note future (black) & S&P future (orange) (intraday): Quiet trading temporarily interrupted by headlines about tax plan

US AHE on the rise, but more evidence is needed before the Fed is more confident higher wages will push inflation up..

Af

Payrolls expected very strong: we side with consensus

Upside risks unemployment rate and Average Hourly earnings

BoE rate hike largely discounted

German Bunds virtually unchanged

Bull flattening US curve continued

Greece spread continues to narrow

Friday, 03 November 2017

P. 3

These links are subject of debate as inflation remains stubbornly low despite full employment. Inflation is one of the two Fed objectives and thus crucial in the Fed’s deliberations on policy. Average Hourly earnings, which jumped a sharp 0.5% M/M in September is expected to have moderated again to 0.2% M/M. That would slow the Y/Y advance to 2.7% from 2.9% in September. Here we see the risks on the upside as the trend of AHE might now be on the rise. We are still proponents of the Phillips curve.

To complete the overview of the US eco calendar. The trade deficit is expected slightly wider, as import growth should pick up. The ISM Non-manufacturing business confidence index is expected to have eased to 58.5 from 59.8. Given the decline of the manufacturing ISM and the good correlation between the two, we suspect indeed a decline of the Non-manufacturing ISM to 58.5. The factory orders are less important, following the release of the durable orders earlier.

US Payrolls wildcard, but unlikely to start new trend

Stock markets trade mixed overnight with China underperforming, but throughout the session sentiment improved. The dollar is little changed and so is the US T-Note future. The Bund opens a few ticks higher.

Today’s trading will be dominated by the October US payrolls release. The outcome of the latter is still more uncertain than usual given the distorted September report (see higher). We suspect that surprises in the headline payrolls will be met with suspicion. We side with consensus on the payrolls, but see upward risks in both the unemployment rate and the average hourly earnings. The latter may be the key metric of the report, given Fed’s attention for (too low) inflation. US Treasuries dropped sharply in September and during part of October, but the move is exhausted and some corrective return action occurred already. Resistance for the T-Note future is now at 125-25+ and support at 124-06. We don’t think that the payrolls will allow a break of either level. We have a longer term US Treasury negative bias and would short the Note future around 125-25+ or in case of a break below the 124-06 low.

Technically, the Bund picture is interesting, as the 162.78 previous top is nearby. A final push towards 163.40 cannot be excluded, but the recent rebound might have stalled. In the wake of an eventual weak payrolls report and a run-up to the above mentioned levels, we would again short the Bund. On the downside, no key support is in danger of breaking.

R2 163.43 -1dR1 162.78BUND 162.68 0.06S1 160.49S2 159.80

German Bund: Near key resistance, which may be tested upon weak US payrolls. Prefer a sell-on upticks near 162.78 or 163.40.

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

Friday, 03 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.

Will payrolls trigger a new USD up-leg?

The dollar showed no clear trend yesterday. Markets awaited the nomination of the new Fed chairman and the tax proposal of the GOP. Equities and the dollar dropped temporary as the first details of the tax plan hit the screens, but the decline was soon reversed. US president Trump as expected appointed Jerome Powell as Fed Chairman. In the end, both factors had only limited impact on markets. The nomination of Powell was largely discounted. The tax proposals are still subject to amendments. EUR/USD finished the session at 1.1658 (from 1.1619). USD/JPY closed the session in well-known territory just north of 114.

Overnight, Asian equities show modest gains. Tech stocks are supported by strong earnings from Apple published after the WS close. Chinese equities underperformed even as the Caixin services PMI rose from 50.6 to 51.2. Chinese authorities consider tighter rules on foreign investments. USD/JPY is little changed in the 114 area in light trading conditions (Japanese markets are closed). EUR/USD holds a tight range in the 1.1650/70 area. Yesterday’s rebound of the Aussie dollar is aborted by poor Q3 retail sales. AUD/USD returned below the 0.77 handle.

Today, the October US payrolls will dominate trading. After a hurricane-distorted September report, a strong bounce is expected. Consensus expects net payrolls’ growth of 323K. We side with the consensus and expected a strong figure. The unemployment rate is expected stable at 4.2%. Average Hourly Earnings are probably the most important element of the report. A moderate 0.2% M/M gain is expected. That would slow the Y/Y advance to 2.7% from 2.9%. We see the risks on the upside. Other US eco data (trade deficit, ISM, factory orders) will be only of second tier importance.

The dollar was in better shape at the end of last week, but the rebound slowed this week. The publication of a tax proposal and the nomination of Powell as Fed Chairman were not able to break the stalemate. If the payrolls (especially AHE) are strong, the dollar might try a new up-leg. However, recent price action showed that there is little room for disappointment. LT we maintain a 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. 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. So, further EUR/USD decline might develop gradually.

Currencies

R2 1.2225 -1dR1 1.2167EUR/USD 1.1658 0.0039S1 1.1511S2 1.1331

Dollar shows no outspoken reaction to nomination of Jerome Powell and to the new republican tax proposals

Dollar going nowhere in Asia

Aussie dollar suffers from poor retail sales

Will payrolls give clear enough guidance for a directional USD move.

Friday, 03 November 2017

P. 5

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 tumbles on soft BoE assessment

Yesterday, the BoE voted 7-2 to raise the base rate by 0.25 bp. However, the policy assessment was very dovish. The BOE assumes that inflation will return close to 2% by the end of the 3-year forecasting horizon. In order to meet the target, only two additional rate hikes are pencilled in. So, this scenario only sees very limited interest rate support for sterling medium term. EUR/GBP jumped from the low 0.88 area to 0.89 area and closed the session at 0.8927. Cable also fell off a cliff and finished the session at 1.3059 (from 1.3245).

Today, the UK services PMI will be published. A small decline from 53.6 to 53.2 is expected. This would confirm the picture that the UK economy has entered an era of lower growth. Markets will also monitor the consequences of the reshuffles within the UK government. More political instability will undermine confidence in the UK government and in sterling. In a day-to-day perspective, the decline of sterling might slow after yesterday’s sell-off. However, sterling remains vulnerable to negative eco and political news which is still highly likely to reoccur.

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 0.89/90 area, but there were no follow-through gains. EUR/GBP retested the 0.8743 support earlier this week, but rebound sharply yesterday. We maintain the view that the 0.8733 -0.8652 support area will be though to break in a sustainable way. A EUR/GBBOP buy-on-dips approach is favoured. 0.9023/33 is the first important resistance for the EUR/GBP cross rate.

R2 0.9415 -1dR1 0.9307EUR/GBP 0.8927 0.0155S1 0.8743S2 0.8657

EUR/GBP: rebounds off 0.8733/43 support on soft BoE policy assessment

GBP/USD near ST range bottom after BoE policy statement

Friday, 03 November 2017

P. 6

Friday, 3 November Consensus Previous US 13:30 Change in Nonfarm Payrolls (Oct) 313k -33k 13:30 Change in Private Payrolls (Oct) 302K -40k 13:30 Change in Manufact. Payrolls (Oct) 15k -1k 13:30 Unemployment Rate (Oct) 4.2% 4.2% 13:30 Average Hourly Earnings MoM / YoY (Oct) 0.2%/2.7% 0.5%/2.9% 13:30 Trade Balance (Sep) -$43.2b -$42.4b 15:00 ISM Non-Manf. Composite (Oct) 58.5 59.8 15:00 Factory Orders (Sep) 1.2% 1.2% 15:00 Factory Orders Ex Trans (Sep) -- 0.4% Canada 13:30 Net Change in Employment (Oct) 15k 10.0k 13:30 Unemployment Rate (Oct) 6.2% 6.2% UK 10:30 Markit/CIPS UK Services PMI (Oct) 53.3 53.6 10:30 Markit/CIPS UK Composite PMI (Oct) 53.8 54.1 China 02:45 Caixin China PMI Composite (Oct) A 51 51.4 02:45 Caixin China PMI Services (Oct) A 51.2- 50.6 Norway 10:00 Unemployment Rate (Oct) 2.5% 2.5% Sweden 08:30 Swedbank/Silf PMI Services (Oct) -- 63.8 Events 11:30 ECB Nowotny speaks in London 17:15 Fed's Kashkari Speaks on Housing and Finance 21:15 ECB's Coeure Speaks in Washington

Calendar

Friday, 03 November 2017

P. 7

10-year Close -1d 2-year td -1d Stocks Close -1dUS 2.35 -0.03 US 1.61 0.00 DOW 23516.26 81.25DE 0.37 0.00 DE -0.75 0.00 NASDAQ 6714.943 -1.59BE 0.61 0.00 BE -0.62 -0.01 NIKKEI 22539.12 0.00UK 1.26 -0.08 UK 0.41 -0.08 DAX 13440.93 -24.58

JP 0.06 0.00 JP -0.16 0.00 DJ euro-50 3688.8 -8.60

IRS EUR USD GBP EUR -1d -2d USD -1d -2d3y -0.08 1.93 0.90 Eonia -0.3520 -0.00205y 0.20 2.07 1.04 Euribor-1 -0.3720 -0.0010 Libor-1 1.2433 0.000010y 0.84 2.33 1.32 Euribor-3 -0.3290 0.0000 Libor-3 1.3848 0.0000

Euribor-6 -0.2760 0.0000 Libor-6 1.5798 0.0000

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

EUR/USD 1.1658 0.0039 EUR/JPY 133.01 0.33 CRB 188.13 0.18USD/JPY 114.08 -0.10 EUR/GBP 0.8927 0.0155 Gold 1278.10 0.80GBP/USD 1.3059 -0.0186 EUR/CHF 1.1651 -0.0006 Brent 60.62 0.13AUD/USD 0.7713 0.0037 EUR/SEK 9.787 0.0257USD/CAD 1.2809 -0.0056 EUR/NOK 9.4843 0.0148

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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