Wednesday, 15 February 2017

P. 1

Rates: Yellen puts solid floor below US yield markets

Fed Yellen confirmed the recent hawkish shift and puts a bottom under US yield markets. It should strengthen markets’ sensitivity to US eco data, starting today with especially US CPI (expected to rise further above the 2%-target. With Yellen’s testimony out of the way, focus will start shifting to Trump’s “phenomenal” tax plan, suggesting more upside for yields.

Currencies: Dollar extends gains as a next Fed rate hike is coming closer

Yesterday, the dollar was supported by comments from Fed’s Yellen as she acknowledged the risks of waiting too long to raise rates. Today, the focus is on the US data. The US CPI trending further north of 2.0% should protect the USD downside. Sterling traders will keep an eye at the UK labour data .

Calendar

• US stock markets ended around 0.4% higher following Fed Yellen’s bullish

assessment on the economy with all main indices hitting new highs. Overnight, most Asian equity markets eke out even bigger gains.

• Janet Yellen’s first day testifying before Congress solidified investor views that the Fed chair is more hawkish, building on sentiment from the most recent Federal Reserve meeting and pushing Treasury yields higher.

• Campaigning for the Dutch election kicks off today with anti-Islam leader Wilders frontrunner in a vote that will test the anti-establishment sentiment that swept Britain out of the EU and Donald Trump into the US presidency.

• French presidential contender Fillon is grappling with resistance to his candidacy within his own Republican party even as polls show a tight race with Macron to reach the second round of voting with National Front leader Le Pen

• Eurogroup Dijsselbloem said on the Greek bailout: "People think that because there's a Eurogroup next week we have to have it worked out. But that's never been my timeframe. It's unthinkable. The IMF must also be on board".

• Japanese PM Abe said US President Trump shared his view at last week's summit that Japan's monetary policy was not currency manipulation but to end deflation. Abe's comments suggest Trump may be softening his criticism.

• US President Trump knew for weeks that national security adviser Michael Flynn had misled the White House about his contacts with Russia but did not immediately force him out, an administration spokesman said.

• Today’s eco calendar heats up with the UK labour market report and several US data (empire manufacturing, CPI, retail sales, industrial production). Yellen testifies to the House. Fed Rosengren and Lacker speak and the Riksbank meets.

Headlines

S&PEurostoxx 50NikkeiOilCRB

Gold2 yr US10 yr US

2yr DE10 yr DEEUR/USDUSD/JPYEUR/GBP

Wednesday, 15 February 2017

P. 2

Yellen sends US Treasuries modestly lower

Yesterday, global core bonds traded uneventful in the run-up to Fed chairwoman Yellen’s semi-annual testimony before a Senate commission. She reiterated that the evolution of the economy warrants further gradual increases in the federal funds rate, but didn’t specifically refer to March in her statement. Nevertheless, waiting too long to tighten policy would be unwise she said. The implied probability of a March rate hike rose to a modest 34% from 30% before her speech (see graph), close to the levels from immediately after the December rate increase. The June meeting is still favoured by markets for the next Fed rate hike with a 73.5% probability, up a marginal 2%. For the whole of 2017, the market discounts only 2 rate increases while the Fed’s rate projections include three rate increases. There’s a considerable amount of uncertainty about the fiscal outlook at this stage and the Fed doesn’t want to base its current rate policy on speculation. Concluding, Yellen was positive on the economic outlook and on the progress to date for its targets of full unemployment and 2% inflation, but retained her gradual approach to policy setting. She kept her options open for a March hike by warning it would be unwise to delay it too long. US Treasuries spiked lower, but rebounded modestly off the lows during and after her comments, suggesting markets didn’t draw final conclusions from her testimony. Data watching will be key.

In a daily perspective, the US yield curve shifted 2 bps (30-yr) to 4.8 bps (5-yr) higher, the belly outperforming, suggesting that Yellen’s message was considered as modestly important for the monetary policy outlook. The German yield curve bear steepened with yields up to 4.8 bps (30-yr) higher. On intra-EMU bond markets, 10-yr yield spread changes versus Germany narrowed modestly (up to 3 bps for Italy and Spain).

Busy US eco calendar: No spectacular data surprises

The US economic calendar contains 5 important items. Following Yellen’s speech, data will again get full attention. We feel that the eco data won’t show an acceleration of activity nor a dangerous rise in inflation. Data may be close to consensus with maybe marginal chances for a disappointment. January inflation is expected to have risen to 2.4% Y/Y from 2.1% Y/Y previously, but the core inflation is expected to have slid slightly to 2.1% Y/Y.

Rates

US yield -1d2 1,23 0,035 1,96 0,0510 2,47 0,0430 3,06 0,04

DE yield -1d2 -0,80 -0,015 -0,42 0,0210 0,37 0,0330 1,16 0,05

T-Note future (black) & S&P (orange) (intraday): Yellen defining driver yesterday, but moves remained modest in size.

Probability rate hike March meeting (blue line) and unchanged outcome (red line)

Core bonds end slightly lower in dull trading

Peripheral/soft-core bonds stop 2 day sell-off with spreads narrowing again

Reasonably strong survey results, but weakness in production and slowing in retail sales

Headline inflation further up on energy prices, but core little changed

Wednesday, 15 February 2017

P. 3

Gasoline prices will be behind the expected rise of the headline figure, while the slight weakening of the core might be due to the clothing component, which was weak recently. Used cars prices and shelter cost are behind the 0.2% M/M increase of the core CPI. We have no reasons to distance us from consensus. Retail sales might have been again weak in January. After a strong Q4, unit car sales have eased, while higher gasoline prices will support the gasoline sales, but that’s mostly a price effect. So, the report may show some moderation in consumption growth. January industrial production will have been held back by unseasonably warm weather affecting utility output negatively, while mining will be strong (due to increased drilling activity). Manufacturing output will rise modestly, given the small rise in manufacturing hours worked. However, the stronger manufacturing confidence should gradually strengthen manufacturing output in the next months. The NY Fed manufacturing and the NAHB on the contrary should stick near recent high levels.

Yellen caps resistance in US Treasuries, more downside

Overnight, most Asian stock markets built on WS’s positive risk sentiment and even extend gains. The US Note future and Brent crude trade stable suggesting that the Bund might nevertheless open neutral.

Today’s eco calendar heats up in the US. Markets will especially focus on the inflation data. Consensus expects CPI to rise further above 2%, due to energy, but core inflation is expected to edge lower. Fed Yellen delivers the second part of her Humphrey-Hawkins testimony to the House and might get a grilling from lawmakers. Nevertheless, her bottom line was clear yesterday (see above) and should strengthen markets’ reaction in case of strong US eco data, which we don’t expect though today. With Yellen out of the way, markets might start counting down to President Trump’s “phenomenal” fiscal stimulus plans, pulling US Treasuries towards the December low around 122-14+, especially if equities should steam ahead.

Technically, the Bund (164.90) and US Note future (125-09/16) failed to break key resistance and we expect these levels to hold. US investors still have to adapt to the Fed’s 2017 rate hike scenario (3 hikes). The market implied probability of 3 hikes this year rose modestly from 37.5% to 42.5% yesterday and the odds of a March rate improved from 30% to 34%. European investors may face another “recalibration” of the ECB’s APP in H2 2017.

R2 164,90 -1dR1 164,45BUND 163,52 -0,47S1 160,72S2 159,91

German Bund: short term picture improved with 164.90 resistance lining up. However, the corrective rally might run into resistance

US Note future: new test of 125-09/16 resistance failed. Yellen’s testilmony caps the topside and suggests move lower in range..

Wednesday, 15 February 2017

P. 4

EUR/USD: dollar extends gradual rebound post-Yellen

USD/JPY: downside growing better protected

USD gains as Yellen won’t wait too long to hike rates

On Tuesday, EUR/USD and USD/JPY held tight ranges ahead of the semi-annual testimony of Fed chair Yellen before the Senate. Yellen reaffirmed that the Fed is coming closer to meeting its targets on employment and inflation. The Fed currently doesn’t include a big fiscal easing in its forecasts as there is still a lack of visibility on the any concrete measures. At the same time, the Fed is aware of the risks of waiting too long to rise rates. So, the Yellen comments could be considered as slightly hawkish. The dollar rallied. EUR/USD closed the session at 1.0578 (1.0598 on Monday). USD/JPY finished the session at 114.26 (from 113.74).

Overnight, Asian equity markets join yesterday’s post-Yellen rally. Japan profits most from the yen decline. USD/JPY is trading in the 114.35 area. In Parliament, PM Abe said that president Trump acknowledged that monetary policy tries to end deflation and is not FX manipulation. The PBOC strengthened the fixing of the yuan to USD/CNY 6.8632, despite overall USD strength, indicating that the PBOC aims tightening monetary policy. EUR/USD hovers in the 1.0580 area, near yesterday’s closing levels.

Today, the US economic calendar is well filled. January inflation is expected to have risen to 2.4% Y/Y from 2.1% Y/Y previously, but the core inflation is expected to have slid slightly to 2.1% Y/Y. We have no reasons to distance us from consensus. US Retail sales growth weakened in recent months. Also in January, sales might been weak. Unit car sales have eased, but higher gasoline prices will support the gasoline sales. January industrial production will have been held back by unseasonably warm weather affecting utility output. Manufacturing output is expected to rise modestly. Price data might be slightly more important for the (FX) market than the activity data. Inflation drifting further north of 2.0% might fuel market expectation on a near term Fed rate hike and support the dollar. Markets will also keep an eye at the Q&A of Yellen’s testimony before the House. Political tensions in France (Fillon) and uncertainty on a solution for the Greek debt crisis are still potential euro negatives. Yesterday, the dollar profited from Yellen’s comments. If the US data do not surprise on the downside, the dollar might remain well supported.

Currencies

R2 1,1145 -1dR1 1,0874EUR/USD 1,0576 -0,0039S1 1,0341S2 1,0000

Dollar holding near the post-Yellen highs

PBOC fixes the yuan stronger against a strong dollar

US CPI and retail sales in focus

Yellen’s appearance before the House still worth watching

Dollar rallies as Fed comes closer to next rate hike

Wednesday, 15 February 2017

P. 5

Global context: The dollar was in a corrective downtrend since the start of January as the Trump reflation trade petered out. Interest rate differentials in favour of the dollar narrowed. Trump’s communication became a source of uncertainty, also for the dollar. At some point, absolute interest rate support should provide a USD floor, especially as the Fed is expected to continue its policy normalisation. Last week, the dollar showed tentative signs of a bottoming out process, supported by the ‘Trump tax promise’. Euro weakness is a factor too. As we see the 1.0874 as solid resistance, a sell EUR/USD on upticks approach is favoured. The downside test of USD/JPY is also rejected. USD/JPY 111.16 (38% retracement of the 99.02/118.66 rally) remains key support. Post-Yellen, the downside of the dollar is better protected. Even so, we are still more cautious on the upside potential of USD/JPY compared to USD/EUR.

EUR/GBP rebound blocked on euro softness

On Tuesday, UK pipeline inflation as indicated by the input PPI rose to a higher than expected 20.5% Y/Y. However, this cost is only filtering into the final consumer prices in a very gradual way. Headline CPI printed at a lower than expected 1.8% Y/Y. Core CPI stabilised at a soft 1.6% Y/Y. Yesterday’s CPI data gave the BoE the room to prologue their wait-and-see tactics. Sterling probably won’t receive additional interest rate support any time soon. EUR/GBP regained the 0.85 big figure after the CPI data, but returned below the 0.85 level as Yellen’s headlines weighed on EUR/USD and on EUR/GBP. EUR/GBP closed the session at 0.8482 (from 0.8460). Cable finished the day at 1.2468.

Today, the UK labour market data will be published. The UK labour market remains solid, but job growth eased of late. This picture will probably be confirmed by today’s data. The wage data have most market moving potential in case of a deviation from consensus. Weekly earnings growth is expected stable at 2.8% Y/Y. Apart from a big positive surprise, there is no reason to question the BoE’s wait-and-see stance. In this context, we don’t expect today’s data to be sterling supportive. Of course, overall euro softness is an issue for EUR/GBP.

Context. Yesterday, EUR/GBP came within striking distance of the 0.8450 support, but a new test was avoided after the CPI data. The picture of EUR/GBP remains indecisive/fragile, but this is partially due to euro weakness, rather than outright sterling strength. We continue to look how the test of the key 0.8540 support turns out. In case of a break, the 0.8304 area is the next MT support. At least partially stop-loss protection on EUR/GBP longs may be considered.

R2 0,9047 -1dR1 0,8881EUR/GBP 0,8489 0,0025S1 0,8471S2 0,8304

EUR/GBP: new test of the 0.8450 support is avoided, but picture remains fragile on euro softness

GBP/USD topside test rejected, but no clear trend.

Wednesday, 15 February 2017

P. 6

Wed., 15 February Consensus Previous US 14:30 Empire Manufacturing (Feb) 7 6.5 14:30 CPI MoM / YoY (Jan) 0.3%/2.4% 0.3%/2.1% 14:30 CPI Ex Food and Energy MoM / YoY (Jan) 0.2%/2.1% 0.2%/2.2% 14:30 Real Avg Weekly Earnings YoY / Hourly Earnings YoY (Jan) --/-- 0.4%/0.8% 14:30 Retail Sales Advance MoM (Jan) 0.1% 0.6% 14:30 Retail Sales Ex Auto MoM (Jan) 0.4% 0.2% 14:30 Retail Sales Ex Auto and Gas (Jan) 0.3% 0.0% 14:30 Retail Sales Control Group (Jan) 0.3% 0.2% 15:15 Industrial Production MoM (Jan) 0.0% 0.8% 15:15 Capacity Utilization (Jan) 75.4% 75.5% 15:15 Manufacturing (SIC) Production (Jan) 0.2% 0.2% 16:00 NAHB Housing Market Index (Feb) 67 67 16:00 Business Inventories (Dec) 0.4% 0.7% UK 10:30 Claimant Count Rate (Jan) 2.3% 2.3% 10:30 Jobless Claims Change (Jan) 0.5k -10.1k 10:30 Average Weekly Earnings 3M/YoY (Dec) 2.8% 2.8% 10:30 Weekly Earnings ex Bonus 3M/YoY (Dec) 2.7% 2.7% 10:30 ILO Unemployment Rate 3Mths (Dec) 4.8% 4.8% 10:30 Employment Change 3M/3M (Dec) 22k -9k EMU 11:00 Trade Balance SA (Dec) 22b 22.7b Spain 09:00 CPI EU Harmonised MoM / YoY (Jan F) -0.9%/3% -0.9%/3.0% Sweden 09:30 Riksbank Interest Rate -0.500% -0.500% Events 16:00 Fed Chair Yellen Delivers Semi-Annual Testimony to House Panel 18:00 Fed’s Rosengren to Address NY Assoc for Business Economics 18:45 Fed’s Harker Speaks in Philadelphia

Calendar

Wednesday, 15 February 2017

P. 7

10-year td -1d 2-year td -1d Stocks td -1dUS 2,47 0,04 US 1,23 0,03 DOW 20504,41 92,25DE 0,37 0,03 DE -0,80 -0,01 NASDAQ 5782,572 18,62BE 0,90 0,02 BE -0,53 0,01 NIKKEI 19437,98 199,00UK 1,31 0,02 UK 0,12 0,00 DAX 11771,81 -2,62

JP 0,09 0,00 JP -0,23 -0,01 DJ euro-50 3308,89 3,66

IRS EUR USD GBP EUR -1d -2d USD td -1d3y -0,05 1,76 0,74 Eonia -0,3530 0,00105y 0,17 2,04 0,95 Euribor-1 -0,3740 -0,0010 Libor-1 0,7700 -0,001110y 0,80 2,40 1,36 Euribor-3 -0,3280 0,0010 Libor-3 1,0390 0,0028

Euribor-6 -0,2410 -0,0010 Libor-6 1,3379 -0,0003

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

EUR/USD 1,0576 -0,0039 EUR/JPY 120,94 0,52 CRB 192,28 0,22USD/JPY 114,36 0,92 EUR/GBP 0,8489 0,0025 Gold 1227,20 -3,50GBP/USD 1,2458 -0,0082 EUR/CHF 1,0648 -0,0018 Brent 55,69 0,07AUD/USD 0,767 -0,0006 EUR/SEK 9,449 -0,0225USD/CAD 1,3074 0,0020 EUR/NOK 8,8813 -0,0102

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 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.

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