Friday, 29 September 2017

P. 1

Rates: Sell-off stopped for now

Today’s calendar contains EMU and US inflation data, but for various reasons we don’t expect these to have a major impact. Yesterday’s V-shaped session suggests that the sell-off phase in bonds is over for now and consolidation is needed before new guidance will decide on the continuation of the sell-off or a more sustained recovery of core bonds.

Currencies: USD rally running into resistance

Yesterday, the rise of US yields and of the dollar ran into resistance. Markets need more evidence that the dollar will get additional interest rate support. This evidence won’t come today. It would be disappointing for USD bulls if EUR/USD would close above 1.1823. EUR/GBP holds near the recent lows, but shows no clear directional trend.

Calendar

• US equities ended flat (NASDAQ) to minimal higher, enough to set a new all-

time closing high (S&P). Asian equities perform better, maybe helped by a slightly weaker dollar. Japanese equities underperformed for the same reason.

• China’s central bank set the renminbi’s trading band weaker again on Friday after the currency hit a five-week low against the dollar during the previous session. The golden week holiday starts in China.

• Japan’s core consumer price index climbed to its highest level for the year to date in August, supported by rising costs for fuel and medical care. Core inflation rose 0.7% Y/Y in August.

• Japanese retail sales slowed in August to 1.7% Y/Y, from 1.8% Y/Y in July and largely below the 2.6% Y/Y consensus. However, both department store sales and household spending rose.

• Fed Fischer said the dot plot reflects the views of the FOMC participants, but it is a forecast, not a fact. He retires in October, meaning his words don’t carry far anymore.

• Today, the attention goes to EMU inflation and US personal spending &income, besides the Chicago PMI and the final Michigan consumer sentiment.

Headlines

S&PEurostoxx 50NikkeiOilCRB

Gold2 yr US10 yr US

2yr DE10 yr DEEUR/USDUSD/JPYEUR/GBP

Friday, 29 September 2017

P. 2

Core bond selling stops and profit taking kicks in

Core bonds declined further in early Asian trading yesterday, likely triggered by Trump’s tax reform plan and its potential reflationary effects. Hawkish comments of Boston Fed Rosengren were a reminder that the Fed continues its gradual tightening rate path despite low inflation. The break below the 200 dma (T-Note future, 10-yr T-Note cash) was the technical reason for more selling. The bond selling slowed and profit taking kicked in (and EUR/USD turned north) when European equity trading started and core bonds would continue to recoup losses into the close, likely due to profit taking. A strong US 7-year Note auction was a minor additional positive. EMU eco data were mixed with German and Spanish inflation slightly below expectations, but economic sentiment indicators very strong and better than expected. US eco data were a bit better than expected with a lower trade deficit and higher inventories, both contributing positively to Q3 GDP. However, we don’t think the eco data were influential for trading.

In a daily perspective, US and German yield curves still steepened, the US one in a bull fashion contray to the bear steepening in previous days. US yields dropped between 2 bps (2-yr) and 0.2 bp (10-yr). the 30-yr yield that outperformed in previous days rose now 0.9 BP. German yields (cash market closed earlier than US one) rose between 0.1 (2-yr) and 1.2 bp (30-yr). On intra-EMU bond markets, 10-yr peripheral yield spread changes versus Germany narrowed 3/9 bps with Greece outperforming.

Busy eco calendar

In EMU, the headline inflation is expected to have risen marginally to 1.6% Y/Y in September from 1.5% Y/Y previously. Based on the released Spanish (1.9% Y/Y from 2% Y/Y) and German stable (at 1.8% instead of expected 1.9% Y/Y) inflation, the risk for EMU CPI is slightly on the downside (stable at 1.5% Y/Y). It shouldn’t be a surprise for markets and thus unlikely to affect core bonds. Core inflation is expected stable at 1.2% Y/Y for the third month in a row. Any deviation is potentially market-moving. EMU national data are not important. In the US, August Personal spending is expected weak (0.1% M/M) and real spending even negative (-0.1% M/M). The already published retail sales (goods) were weak and the unit car sales figures sharply declined. Power outages resulted in a drop of utility spending. Little change is expected in the PCE deflators (in line with already released CPI figures), but if they surprise, it might trigger a reaction. The Chicago Fed business confidence is expected little changed at a high 58.7. Already released regional business surveys showed increased strength, but given high level and the volatility of the index, we prefer to side with the consensus. Michigan consumer sentiment (final) is expected to be confirmed at 95.3.

Rates

US yield -1d2 1.45 -0.025 1.90 -0.0110 2.31 0.0030 2.87 0.01

DE yield -1d2 -0.70 0.005 -0.26 0.0110 0.48 0.0130 1.32 0.01

T-Note future (black) & S&P future (orange) (intraday): Selling bonds stops in early European trading and profit taking on shorts kick in.

S&P: unevtful session yesterday, but worth mentioning: a new all-time closing. Upward trend is still perfectly in place.

Aff

Profit taking on shorts kick in

US T-note gains modest in daily perspective, German bonds still slightly down.

Peripheral yield spreads narrow

EMU inflation likely stable in sept.

US data unlikely to give firm guidance

Friday, 29 September 2017

P. 3

US 7-year auction went great

The US $28B 7-yr Note auction results were tremendous. The auction stopped at 2.13% more than 1 bp through the WI, the bid cover of 2.70 was the largest since April and the buy-side takedown (70.6% Indirect bid and 19% direct bid) the second largest on record.

Calm trading at final session of Q3?

Asian stock markets trade fairly well at the closing session of the quarter. The T-Note future consolidates after yesterday’s intra-day return action. The US dollar consolidates as well. Japanese eco data were mixed, but overall on the weaker side of expectations. The downward correction of oil prices slowed. We expect a neutral opening for the Bund (around 160.90).

Today’s eco calendar is well filled, but we don’t think the data will have lasting impact on bond trading. EMU headline inflation should stabilize, but only an unlikely surprise of the core measure might have market impact. Similarly, the US eco data might go by without much fuss, unless the PCE (core) deflator would surprise. Yesterday’s intra-day return action of bonds may signal that the September sell-off at least needs a breather. Given the unenticing market calendar, that may point to calm end-of-quarter trading (consolidation). Markets may now wait for the US payrolls next week before deciding whether the sell-off has further to go or whether it’s time to correct higher again.

After the FOMC meeting, we concluded that US Treasuries re-entered a sell-on-upticks phase as the Fed confirmed its view on 2017/2018 interest rate policy. A December rate hike isn’t fully discounted yet (66.6%). We hold a sell-on-upticks view in the Bund as well as the ECB’s normalisation process slowly takes off and as speculation on the future of APP will rise in the run-up to the October 26 ECB policy meeting. From a technical point of view, the US Note future is heading for a complete retracement of this Summer’s rally (124-14 target). Losses in the Bund are smaller so far, but we also eye a return towards 159.80 in first instance (62% retracement) and 157.55 afterwards.

R2 163.43 -1dR1 161.98BUND 160.9 -0.22S1 160.49S2 160.50

German Bund: Downtrend is not broken, but yesterday’s price action suggests some exhaustion of the sell-off.

US Note future: Similar as per Bund, but here a full retracement of the summer rally looks likely longer term

Friday, 29 September 2017

P. 4

EUR/USD correction slows. Next support at 1.1662 stays out of reach

for now.

USD/JPY: trending gradually higher in the 1.08/114.49 trading

range

Dollar rebound waiting for new guidance

The dollar rally from earlier this week stalled yesterday. Core yields initially went higher, but it didn’t support more USD gains. In the European session, US and yields and the dollar corrected gradually lower. Markets apparently need more details on the Trump tax plan to assess its impact on growth. US eco data were OK, but with little impact on the dollar. EUR/USD finished the session at 1.1786 (from 1.1745). The S&P 500 set a minor record top, but the gain was too small to support USD/JPY. The pair closed the day at 112.63.

Asian equity markets ex-Japan are trading in positive territory. Activity slows as several markets including China prepare for holidays next week. Japan hovers around yesterday’s closing level. Japanese eco data were mixed (see headlines). The data give the BOJ every reason to maintain its very loose monetary policy. The yen lost a few ticks after the data. USD/JPY trades in the 112.60 area. EUR/USD stabilizes in the 1.1775 area.

The eco calendar is busy today. In EMU, the headline inflation is expected to have risen marginally to 1.6% Y/Y in September from 1.5% Y/Y. Based on lower than expected national figures in Spain and Germany, we see risk for a below-consensus EMU CPI (stable 1.5% Y/Y). Core inflation is expected stable at 1.2% Y/Y. A substantial deviation from consensus is probably needed to move the euro. In the US, August Personal spending is expected weak (0.1% M/M) as indicated by the retail sales data. The PCE deflators are expected little changed to marginally higher. This indicator is important in the Fed’s inflation assessment. A positive surprise might be slightly supportive for the dollar. Michigan consumer sentiment (final) is expected to be confirmed at 95.3.

The dollar rallied strongly earlier this week, as investors realised that the chances on a Dec. Fed rate hike have risen. The US government stepped up its efforts to put tax reform on the rails. Both factors propelled US yields and the dollar, but the repositioning stalled yesterday. The dollar (and US yields) need more hard news to sustain a further rise. Today’s eco data may have intraday impact, but ‘big news’ isn’t expected. We expect calm trading at the last session of the quarter. EUR/USD dropped below a first support (1.1823). It would be disappointing for USD bulls if the pair would return (an close) north of the this level.

Currencies

R2 1.2225 -1dR1 1.2167EUR/USD 1.1786 0.0041S1 1.1662S2 1.1311

Dollar rebound stalled

Asian equities show modest gains

Yen trades marginally softer

Plenty of eco data

EMU CPI might be slightly softer

US PCE deflator a wildcard?

Friday, 29 September 2017

P. 5

From a technical point of view EUR/USD hovered in a consolidation pattern between 1.1823 and 1.2070. It took time to break below the 1.1823 range bottom, but the break occurred earlier this week. The rise in US yields looks more solid and so does the rebound of the dollar. Next support in EUR/USD comes in at 1.1662. The day-to-day momentum in USD/JPY was constructive recently, but it was primarily due to yen weakness. USD/JPY regained the 110.67/95 previous resistance, a short-term positive. The 114.49 correction top is the next important reference. The cross rate remains sensitive to changes in overall risk sentiment.

GBP/EUR holding strong, but no further progress.

Sterling had a roller-coaster ride yesterday. At the BoE independence conference, BoE’s Carrey reiterated that the Bank will support the UK through the Brexit process. He didn’t give much weight to the rise in inflation. Markets considered it a dovish assessment, triggering euro selling. The headlines from the UK-EU Brexit negotiations also weren’t too positive. EU’s Barnier said it can take weeks or even months to achieve sufficient Brexit progress. Sterling was sold against the euro and the dollar, but the UK currency showed good resilience later on and almost fully reversed the early losses in the afternoon. EUR/GBP closed the session at 0.8769. Cable rebounded to close at 1.3442

Overnight, UK Gfk consumer confidence was marginally better than expected at -9 (from -10). Later today, the Q2 current account, the monetary data (money supply) and the final reading of the UK Q2 GDP will be published. We don’t expected the data to have a lasting impact on trading. The latest round of the UK-EU Brexit negotiations again didn’t yield much progress, but had little direct impact on sterling either. Over the previous days, the sterling rally (against the euro) lost momentum, but there is no clear sign of a significant countermove. This consolidation process might continue today.

EUR/GBP made an impressive uptrend from April to set a MT top at 0.9307 late August. UK price data amended the dynamics and hawkish BoE comments reinforced a sterling rebound. Medium term, we maintain a EUR/GBP buy-on-dips approach as we expect the mix of euro strength and sterling softness to persist. However, the prospect of (limited) withdrawal of BOE stimulus put a solid floor for sterling ST term. We look how far the current correction goes. EUR/GBP is nearing support at 0.8743 and 0.8652, which we consider difficult to break. We gradually look to by EUR/GBP on dips.

R2 0.9415 -1dR1 0.9307EUR/GBP 0.8768 -0.0005S1 0.8743S2 0.8657

EUR/GBP: downtrend shows tentative signs of slowing.

GBP/USD: drifting off the recent high.

Friday, 29 September 2017

P. 6

Friday, 29 September Consensus Previous US 14:30 Personal Income (Aug) 0.3% 0.4% 14:30 Personal Spending (Aug) 0.1% 0.3% 14:30 Real Personal Spending (Aug) -0.2% 0.2% 14:30 PCE Deflator MoM / YoY (Aug) 0.3%/1.5% 0.1%/1.4% 14:30 PCE Core MoM / YoY (Aug) 0.2%/1.4% 0.1%/1.4% 15:45 Chicago Purchasing Manager (Sep) 57.5 58.9 16:00 U. of Mich. Sentiment (Sep F) 95.3 95.3 Japan 01:30 Jobless Rate (Aug) A 2.8% 2.8% 01:30 Overall Household Spending YoY (Aug) A 0.6% -0.2% 01:30 Natl CPI YoY (Aug) A 0.7% 0.4% 01:30 Tokyo CPI YoY (Sep) A 0.5% 0.5% 01:30 Tokyo CPI Ex-Fresh Food, Energy YoY (Sep) A 0.0% 0.0% 01:50 Retail Sales MoM / YoY (Aug) A-1.7%/1.7% 1.1%/1.8% 01:50 Industrial Production MoM / YoY (Aug P) A 2.1%/5.4% -0.8%/4.7% 07:00 Housing Starts YoY (Aug) A 0.6% -2.3% UK 01:01 GfK Consumer Confidence (Sep) -12 -10 10:30 Current Account Balance (2Q) -15.9b -16.9b 10:30 Net Consumer Credit (Aug) 1.4b 1.2b 10:30 Money Supply M4 MoM / YoY (Aug) --/-- 0.5%/4.4% 10:30 GDP QoQ / YoY (2Q F) 0.3%/1.7% 0.3%/1.7% 10:30 Index of Services MoM 3M/3M (Jul) 0.1%/0.7% 0.4%/0.5% 10:30 Total Business Investment QoQ / YoY (2Q F) --/-- 0.0%/0.0% EMU 11:00 CPI Estimate YoY (Sep) 1.6% 1.5% 11:00 CPI Core YoY (Sep A) 1.2% 1.2% Germany 08:00 Retail Sales MoM / YoY (Aug) 0.5%/3.3% -1.2%/2.7% 09:55 Unemployment Change (000's) (Sep) -5k -5k 09:55 Unemployment Claims Rate SA (Sep) 5.7% 5.7% France 08:45 CPI EU Harmonized MoM / YoY (Sep P) -0.2%/1.0% 0.6%/1.0% 08:45 Consumer Spending MoM / YoY (Aug) --/-- 0.7%/2.1% Italy 11:00 CPI EU Harmonized MoM / YoY (Sep P) 1.8%/1.3% 0.1%/1.4% Norway 10:00 Unemployment Rate (Sep) -- 2.7% Events 14:00 BoE Cunliffe speaks at conference in Brussels 14:30 BOE's Broadbent Speaks at Conference in London 16:15 BOE's Carney in dialog in London 17:00 Fed's Harker Speaks at Fintech Event on Consumers and Banking

Calendar

Friday, 29 September 2017

P. 7

10-year Close -1d 2-year td -1d Stocks Close -1dUS 2.31 0.00 US 1.45 -0.02 DOW 22381.2 40.49DE 0.48 0.01 DE -0.70 0.00 NASDAQ 6453.451 0.19BE 0.76 0.01 BE -0.54 0.00 NIKKEI 20356.28 -6.83UK 1.38 -0.01 UK 0.45 -0.02 DAX 12704.65 47.24

JP 0.06 -0.01 JP -0.12 -0.01 DJ euro-50 3563.64 8.47

IRS EUR USD GBP EUR -1d -2d USD -1d -2d3y -0.04 1.81 0.93 Eonia -0.3600 0.00105y 0.25 1.97 1.11 Euribor-1 -0.3720 0.0000 Libor-1 1.2350 0.000010y 0.92 2.27 1.41 Euribor-3 -0.3290 0.0000 Libor-3 1.3328 0.0000

Euribor-6 -0.2730 0.0000 Libor-6 1.5039 0.0000

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

EUR/USD 1.1786 0.0041 EUR/JPY 132.41 -0.12 CRB 182.99 -0.87USD/JPY 112.34 -0.50 EUR/GBP 0.8768 -0.0005 Gold 1288.70 0.90GBP/USD 1.3442 0.0055 EUR/CHF 1.1434 0.0018 Brent 57.41 -0.49AUD/USD 0.7856 0.0007 EUR/SEK 9.5615 -0.0099USD/CAD 1.2428 -0.0049 EUR/NOK 9.3567 0.0150

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

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