Thursday, 04 May 2017

P. 1

Rates: June rate hike discounted after FOMC meeting

The FOMC kept policy unchanged but labelled the Q1 growth slowdown as “transitory”, suggesting they remain on track to hike rates in June. The market implied probability of a June rate hike increased from 66% to 97.5%, triggering a modest repositioning in US yields (higher, front end underperforming). Today’s focus turns to US Congress.

Currencies: Dollar modestly higher on FOMC statement

The dollar gained modest ground as the Fed didn’t change rate hike expectations. The technical picture of USD/JPY improved as the pair regained the 112.20 level. Today, FX traders will keep an eye at the Healthcare vote in the US Congress and look forward to the payrolls. The dollar probably needs high profile good news to regain sustained ground against the euro.

Calendar

• US stock markets ended marginally lower with Nasdaq underperforming,

dragged down by mediocre Apple earnings. Overnight, Asian stocks trade mixed with China underperforming following a weaker Caixin services PMI.

• The Fed kept policy unchanged and said it expected economic growth to rebound after a soft first quarter, signaling the central bank is likely to continue gradually raising short-term interest rates this year if it is right.

• France’s two presidential candidates clashed on primetime over the economy, home-grown jihadism and the EU, in a fierce showdown. An Elabe poll suggested that centrist Macron had appeared more convincing for 63% of the viewers.

• Theresa May has accused “European politicians and officials” of threatening Britain and trying to sabotage her attempt to win the general election in an apparently deliberate move to stoke Brexit tensions with Brussels.

• House Republican leaders said the chamber would vote today on their bill to replace most of Obamacare, in a show of confidence that they can lock down enough Republican support for a bill that sparked a nationwide debate.

• Belgium sold about a quarter of its stake in BNP Paribas to raise cash (€2.03B), taking advantage of a rally in the stock as it neared a post-crisis high. The government’s stake drops from 10.3% to 7.8%

• Today’s eco calendar contains services PMI’s in EMU (final) and the UK and US weekly jobless claims. ECB Lautenschlaeger, Praet and Draghi are scheduled to speak. Spain and France tap the market. Norges bank decides on policy.

Headlines

S&PEurostoxx 50NikkeiOilCRB

Gold2 yr US10 yr US

2yr DE10 yr DEEUR/USDUSD/JPYEUR/GBP

Thursday, 04 May 2017

P. 2

Fed statement more hawkish than markets expected

Global core bonds treaded water ahead of the FOMC decision, bar some volatility after the weaker European equity market opening, after an advisory committee to the US Treasury concluded that there is little evidence of strong or sustainable demand for ultra-long US government bonds (>30y) and after a very strong US non-manufacturing ISM. The FOMC press release was a bit hawkish and sent US Treasuries lower, the front end underperforming. In a daily perspective, changes on the US yield curve ranged between +4.9 bps (5-yr) and -0.1 bp (30-yr). The German yield curve barely changed (between -0.5 bps and +0.4 bps). On intra-EMU bond markets, 10-yr peripheral spreads narrowed 4 bps for Spain/Italy and 10 bps for Portugal.

FOMC leaves door open for June rate hike

The FOMC kept its policy rate unchanged at 0.75%-1%. They said that the Q1 growth slowdown was likely transitory. Fundamentals underpinning consumption stayed solid, even as household spending rose only modestly. The labour market continued to strengthen even as growth slowed, while business investment firmed. The FOMC repeats that the risks appear roughly balanced. Inflation has been running close to the 2% longer-run objective, while core inflation declined in March and continued to run somewhat below 2%. The FOMC expects the economy to warrant gradual rate hikes and maintained its balance sheet re-investment strategy. The FOMC vote was unanimous. Concluding, the FOMC leaves the way open for a June rate hike, if growth rebounds, labour markets remain reasonably strong and inflation stays near the objective. The implied probability of a June rate hike increased to 97.5% from 67%. Chances on an additional rate hike (Dec) increased to 55% from 24%.

ECB speakers key, but US payrolls loom

The are plenty of second tier EMU and US eco data on the agenda, but we don’t expect them to influence trading on the eve of the key US payrolls report. Speeches by ECB Draghi, Praet and Lautenschlaeger could be more important. ECB Nowotny already said that the ECB will have to hold a discussion about its strategy for 2018 and the eventual exit from its ultra-easy monetary policy at the June 8 meeting. His message conflicted with Draghi’s suggestion that the ECB would not change its policy in the near term. Inflation printed much stronger than expected, but it’s unlikely that Draghi already changes his view by stressing the importance of the June meeting. Praet will probably dismiss the inflation data and suggest that the ECB doesn’t care much about one set of data. Lautenschlaeger is a staunch opponent of the current very accommodative policy. Will she start the offensive of the hawks or is the timing not right yet?

Rates

US yield -1d2 1,30 0,045 1,86 0,0510 2,33 0,0430 2,97 -0,01

DE yield -1d2 -0,71 0,015 -0,36 0,0210 0,35 0,0330 1,13 0,02

Fed more hawkish than expected, but losses on curve modest

US 2-yr yield modestly higher, but still well below March peak

Fed rate probabilities after today’s meeting for June’s meeting: blue (unchanged) & red (+25 bps): Markets positioned for rate hike.

FOMC leaves policy unchanged

Q1 slowdown transitory

Consumption fundamentals solid

Confirmed gradual rate hikes likely warranted.

No dissenters

EMU/US data unlikely to play role today

ECB speakers on the contrary might surprise

Thursday, 04 May 2017

P. 3

France and Spain tap market

The French debt agency taps the on the run 10-yr OAT (1% May2027), off the run OAT (2.5% May2030) and on the run 20-yr OAT (1.25% May2036) for a combined €7-8B. Bonds on offer became more expensive in ASW spread terms going into the auction. The on the run OAT’s trade a tad rich on the French curve while the off the run May 2030 is slightly cheaper. Overall we expect decent demand though as the first French presidential round eliminated the Frexit risk. The Spanish treasury taps the on the run 5-yr Bono (0.4% Apr2022), on the run 15-yr Obligacion (2.35% Jul2033) and two off the run bonds (0.75% Jul2021 & 1.3% Oct2026) for a combined €4-5B. The bonds didn’t cheapen going into auction. The two short-dated Bono’s trade normal on the curve while the longer-dated ones on offer are rather expensive. We expect mediocre demand.

June rate hike discounted

Overnight, Asian equity markets trade mixed with China slightly underperforming (weaker PMI) and Japan closed. The US Note future and Brent crude (just above key support) stabilise. The Bund is expected to open around pre-market levels (incorporating slight FOMC losses).

Today’s eco calendar contains several second tier eco data which won’t influence trading. With a June rate hike almost completely discounted, there’s no additional (Fed) repositioning lower necessary in the US Treasury market. The US focus turns to the health care vote in US Congress (today), payrolls and Fed speakers (tomorrow). Ahead of the vote, US Treasuries will be driven by general risk sentiment. If House Republican leaders manage to push the vote through, focus can shift to tax reforms after recess. It would be positive for the reflation trade (negative US Treasuries).

From an EMU (Bund) side, we keep a close watch on ECB speakers (Draghi, Praet, Mersch, Lautenschlaeger). They are potential market movers as the June meeting comes closer and especially if they resonate earlier (hawkish) comments from ECB Nowotny who puts the June meeting forward to discuss the ECB’s exit strategy and road map for 2018. Such comments could start exit speculation and are negative for Bunds.

US stock markets (prone for a correction lower?) and oil prices (two tests of key support earlier this week) are wildcards for trading.

R2 163,99 -1dR1 162,49BUND 161,41 -0,34S1 158,73S2 158,28

German Bund: Nice rebound on Draghi. Post French election gap probably needs to be closed before new downward action may occur.

US Note future: lower on FOMC statement, but June rate hike nearly completely discounted. Focus on US Congress and payrolls

Thursday, 04 May 2017

P. 4

EUR/USD declines modestly after Fed policy statement, but technical

picture is little changed

USD/JPY: technical picture improved as the pair regained the

112.20 neckline.

Dollar gains modest ground after Fed decision

Trading in EUR/USD and USD/JPY was locked in tight ranges yesterday as investors awaited guidance from the Fed’s policy statement later in the evening. The Fed kept its policy unchanged and basically maintained its assessment from March. Q1 economic weakness is considered transitory. So, the expected path of (at least) two additional rate hikes this year remains valid. The dollar gained modest ground after the Fed’s policy statement. EUR/USD closed the session at 1.0886 (from 1.0930). USD/JPY finished the day at 112.75, from 111.99.

Overnight, Asian equities show a mixed picture. Japan is still closed for the golden week holidays. Chinese equities again underperform. After the Caixin manufacturing PMI, also the services PMI declined, from 52.1 to 51.2. Yesterday’s substantial decline of several industrial commodities might be a (slightly) negative for some Asian markets this morning. The dollar maintains most of its post-Fed gains. EUR/USD trades around 1.0895. USD/JPY is changing hands in the 112.80 area. The Aussie dollar is trading at the lowest level since mid-January (0.74 area). The stronger US dollar and lower commodities weighed on AUD. RBA’s Lowe warned that high household debt makes the economy less resilient to shocks.

EMU data (final April services PMI and EMU March retail sales) probably won’t move FX trading today. US eco data are plentiful (Challenger layoffs, initial claims, nonfarm productivity, factory orders and the March trade balance ) but the impact on the dollar, if any, should only be of intraday significance on the eve of the US payrolls report. Speeches of ECB president Draghi and Executive Board members Praet and Lautenschlaeger might be more important. Draghi last week held off the debate on policy normalization. Since, inflation came out much stronger than expected, but it is unlikely that he will already change his view. However, we are keen the hear the view of Praet and hawk Lautenschlaeger. Will she start the offensive of the hawks?

In a daily perspective, the dollar might be better supported after yesterday’s Fed statement. The market almost fully discounts a June rate hike (97.5%). This should be modestly USD supportive. ECB speakers are a wildcard for the euro. As we don’t expect Draghi or Praet to already signal a change in their assessment, the euro reaction should be limited. However, any small hint might be euro supportive. Of late, USD/JPY profited most from a rise in core yields. This trend might continue. For EUR/USD, we expect the pair to stay away from the 1.0950

Currencies

R2 1,13 -1dR1 1,1145EUR/USD 1,0897 -0,0027S1 1,0778S2 1,0341

Eco calendar well filled, but probably no driver for USD trading

Dollar probably better bid after the FOMC

ECB speakers are a wildcard

Dollar succeeds modest gains as the Fed’s policy assessment was little changed

The dollar maintains most of its post-Fed gains this morning

China Caxin services PMI weakens

Aussie dollar at lowest level in about for months

Thursday, 04 May 2017

P. 5

resistance going into the payrolls. However, really strong US data/or other good news (Healthcare bill?) are probably needed to push the pair back south.

Last week, the European risk trade supported USD/JPY, but also EUR/USD and EUR/JPY. The market pondered whether declining political risk could bring forward the ECB’s normalisation process. This hope was moderated after the ECB press conference. The Fed confirming its intentions on policy normalisation is also slightly USD supportive. From a technical point of view, USD/JPY started a bottoming out process and yesterday’s re-break above 112.20 improved the technical picture. Next intermediate resistance comes in at 115.51. EUR/USD extensively tested the topside of the MT range (1.0874/1.0906 area) late March. The pair returned to the range top after the French election and set minor new highs. Yesterday’s move slightly eased the upside momentum, but the technical picture hasn’t changed. A decline below 1.0821 would suggest that the dollar is regaining traction against the euro. For now, we maintain a neutral bias.

Brexit tensions slightly weigh on sterling

Sterling was under pressure at the start of European trading yesterday as an FT article indicated that the EU could demand the UK a ‘separation charge’ of up to €100B. The report followed other recent signals that the UK and the EMU might be heading for very tough Brexit-negotiations. EUR/GBP touched an intraday top of 0.8476. Cable spiked to the 1.2885 area. However there was no follow-through sterling selling. The UK April construction PMI rebounded to 53.1 from 52.2 (52.0 was expected). The release is not that important for markets, but it helped to put a floor for sterling even as the political bickering between the EU and the UK continued. EUR/GBP closed the session at 0.8460. Cable finished the day at 1.2867, but part of the intraday decline was due to the post-Fed USD rebound.

Today’s eco calendar contains the services PMI and the monetary data. The services PMI is expected to decline slightly from 55.00 to 54.5. However, the manufacturing measure and the construction PMI surprised on the upside. A really strong figure might be slightly supportive for sterling. Over the previous days, Brexit tensions between the UK and the EU came again more to the forefront as a driver for sterling trading. Overnight, UK PM May accused EU officials of interfering in the UK election process. If the bickering continues it might be a further negative for sterling. We have the impression that the downside in EUR/GBP has become better protected.

Two weeks ago, EUR/GBP dropped below EUR/GBP 0.84 support, (temporary) improving the sterling picture. The pair came within reach of the key 0.8305 support (Dec low), but no real test occurred. After last week’s EUR/GBP rebound, the range bottom is better protected. Longer term, Brexit-complications remain potentially negative for sterling. On technical considerations we are inclined to reconsider a cautious EUR/GBP buy-on-dips approach.

R2 0,8881 -1dR1 0,8854EUR/GBP 0,8461 -0,0009S1 0,8314S2 0,8304

EUR/GBP: downside better protected after last week’s rebound

GBP/USD: tentative signs of a topping out process?

Thursday, 04 May 2017

P. 6

Thursday, 4 May Consensus Previous US 13:30 Challenger Job Cuts YoY (Apr) -- -2.0% 14:30 Nonfarm Productivity (1Q P) -0.1% 1.3% 14:30 Trade Balance (Mar) -$44.5b -$43.6b 14:30 Unit Labor Costs (1Q P) 2.7% 1.7% 14:30 Initial Jobless Claims 248k -- 14:30 Continuing Claims 1990k -- 16:00 Factory Orders / Ex Trans (Mar) 0.4%/-- 1.0%/0.4% 16:00 Durable Goods Orders (Mar F) 0.7% -- China 03:45 Caixin China PMI Composite (Apr) A: 51.2 52.1 03:45 Caixin China PMI Services (Apr) A: 51.5 52.2 UK 10:00 New Car Registrations YoY (Apr) -- 8.4% 10:30 Markit/CIPS UK Services PMI (Apr) 54.5 55.0 10:30 Markit/CIPS UK Composite PMI (Apr) 54.5 54.9 10:30 Net Consumer Credit (Mar) 1.2b 1.4b 10:30 Mortgage Approvals (Mar) 67.2k 68.3k 10:30 Money Supply M4 MoM / YoY (Mar) --/-- -0.3%/5.7% EMU 10:00 Markit Eurozone Services PMI (Apr F) 56.2 56.2 10:00 Markit Eurozone Composite PMI (Apr F) 56.7 56.7 11:00 Retail Sales MoM / YoY (Mar) 0.1%/2.1% 0.7%/1.8% Germany 09:55 Markit Germany Services PMI (Apr F) 54.7 54.7 09:55 Markit/BME Germany Composite PMI (Apr F) 56.3 56.3 France 09:50 Markit France Services PMI (Apr F) 57.7 57.7 09:50 Markit France Composite PMI (Apr F) 57.4 57.4 Italy 09:45 Markit/ADACI Italy Services PMI (Apr) 53.6 52.9 09:45 Markit/ADACI Italy Composite PMI (Apr) 54.6 54.2 Spain 09:15 Markit Spain Services PMI (Apr) 57.7 57.4 09:15 Markit Spain Composite PMI (Apr) 57.0 56.8 Norway 10:00 Deposit Rates 0.50% 0.50% Sweden 08:30 Swedbank/Silf PMI Services (Apr) -- 61.3 Events Q1 Earnings Siemens (07:00), AB Inbev, … 10:30 Spain to Sell 0.75% 2021, 0.4% 2022, 1.3% 2026 & 2.35% 2033 Bonds 10:50 France to Sell 1% 2027, 2.5% 2030 & 1.25% 2036 Bonds 12:30 ECB’s Lautenschlaeger speaks in Frankfurt 13:00 ECB’s Praet speaks in Brussels 13:35 ECB’s Mersch speaks in Luxembourg 17:30 ECB's Draghi Speaks in Lausanne, Switzerland

Calendar

Thursday, 04 May 2017

P. 7

10-year td -1d 2-year td -1d Stocks td -1dUS 2,33 0,04 US 1,30 0,04 DOW 20957,9 8,01DE 0,35 0,03 DE -0,71 0,01 NASDAQ 6072,55 -22,82BE 0,78 0,02 BE -0,54 0,00 NIKKEI 19445,7 0,00UK 1,07 -0,02 UK 0,08 0,00 DAX 12527,84 19,94

JP 0,02 0,00 JP -0,20 0,00 DJ euro-50 3586,25 8,04

IRS EUR USD GBP EUR -1d -2d USD td -1d3y -0,03 1,75 0,63 Eonia -0,3570 -0,00105y 0,21 1,97 0,79 Euribor-1 -0,3730 0,0010 Libor-1 0,9928 -0,002210y 0,81 2,28 1,15 Euribor-3 -0,3290 0,0000 Libor-3 1,1737 0,0014

Euribor-6 -0,2510 -0,0020 Libor-6 1,4324 0,0061

Currencies td -1d Currencies td -1d Commodities td -1d

EUR/USD 1,0897 -0,0027 EUR/JPY 122,97 0,44 CRB 180,40 0,06USD/JPY 112,84 0,69 EUR/GBP 0,8461 -0,0009 Gold 1236,90 -19,70GBP/USD 1,288 -0,0017 EUR/CHF 1,0833 0,0000 Brent 50,60 -0,28AUD/USD 0,7412 -0,0081 EUR/SEK 9,6367 0,0102USD/CAD 1,3717 -0,0020 EUR/NOK 9,4246 0,0319

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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