Markets. Rates. Wednesday, 10 May 2017

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1 Wednesday, May 7 Markets Rates 6 - Policy Rates,,8,6,, -, -, EURIBOR M / USD LIBOR M ECB FED BOE ECB Deposit EURIBORM USD LIBOR M The Fed and ECB kept their policy unchanged but key meetings are lining up in June. The Fed will normally hike rates with another bps to %.%. The ECB might decide on the shape of monetary policy in H 7. US Libor m rate reached new cycle high as markets discount a June rate hike. Euribor m flat lines around.%. Markets only expect the deposit rate to be back in positive territory around mid 9 Swap Rates (%),,, -, EURIBOR M,,, -, -, -, -, EUR Yr Swap Rate US Yr Swap Rate April ECB Meeting (7/) March ECB meeting (9/) Today (/) EMU growth momentum strengthened further and even core inflation picked up. Markets sense a change of heart at the ECB, pushing swap rates again higher. The outcome of the French presidential election caused EMU underperformance vs. US The Euriborm forward curve bear steepened after the April ECB meeting. ECB president Draghi did his utmost best to be as neutral as possible, but investors start speculating on the start of the ECB s normalisation process. P.

2 Wednesday, May 7,7 Euro Swap Curve Intra-EMU Yield Spreads (Yr),,,,7,,, -, //7 8//7 8//7 Spain Italy Belgium France Bear steepening yield curve as EMU eco data remained strong, French elections went well and as ECB exit speculation gains more traction. Peripheral spreads narrowed significantly as markets priced out the Frexit risk. Markets heaved a sigh of relief after the first round of the French presidential elections, which gave Macron a red carpet treatment. Currencies EUR/USD EUR/GBP,,,,,,,,,9,88,8,8,76,7,68 EUR/USD rebounded in April and early May as investors anticipated a constructive outcome of the French election. At the same time, the dollar remained in the defensive even as a June Fed rate hike is largely discounted.. EUR/GBP holds in the.8/.88 consolidation pattern. Sterling stays resilient even as eco data suggest a gradual cooling in activity and as political bickering between UK and EU politicians suggests tough Brexit negotiations P.

3 Wednesday, May 7 USD/JPY EUR/CZK 9 8, 8 7, 7 6, USD/JPY rebounded since mid April after a protracted slide since the start of the year. The move was supported by an ongoing positive risk sentiment and by a bottoming out in US en European yields. EUR/CZK: The Czech central Bank finally gave up its commitment to prevent the koruna from appreciating below EUR/CKZ 7. The initial gain of the koruna was limited as investors had massively positioned for a CZK appreciation EUR/PLN,6,,,,,,9 EUR/HUF 9 The zloty maintains a positive momentum since early December. Polish growth slowed in 6, but there are signs that a bottom might be in place. A NBP rate hike isn t around the corner, but markets ponder the NBP s options. Strong domestic fundamentals supported the forint in 6 despite absolute low yields. However, the NBH continues to speak soft and keeps monetary policy ultra easy, preventing further forint gains. P.

4 Wednesday, May 7 Others Brent Crude Oil (Future) - ($/barrel) Gold (Future) - $/ounce Brent oil dropped below the psychological $/barrel mark on rising inventories and as the OPEC production cut agreement approaches its end (June). Will OPEC decide on an extension at the May OPEC meeting? Gold corrected lower as risk sentiment improved following the outcome of the first round of French presidential elections. The general decline of all commodities weighed as well. 7 7 CRB Commodity Index 8 6 Euro Stoxx 6 Global commodity prices feel the pain as China s growth momentum seems to be slowing, pulling demand lower. European shares started a new rally, with financials outperforming, as the first round of the French presidential election ruled out the Frexit tail risk. Strong EMU growth and earnings added to the rally. P.

5 Wednesday, May 7 Economic Overview Eurozone Euro zone GDP (Q/Q contribution to growth) Euro zone PMI Manufacturing (blue) & Services (red), 7,, -, - -, - 6 government household gross fixed capital formation change in inventories exports imports GDP Q/Q The EMU economy grew by.% Q/Q and.7% Y/Y in Q, virtually unchanged from Q. Details regarding the composition of the growth aren t released yet. Sentiment in the euro zone services sector (red) rose further in April to a very high 6. from 6 previously, while sentiment in the manufacturing sector continued to improve for a seventh month to a high 6.7. This bodes well for Q growth. Euro zone Inflation Euro zone Unemployment,, , - - CPI - Y/Y (Left axis) Core CPI - Y/Y (Left axis) EC Industrial confidence - selling price expectations (Right axis) EMU headline inflation rebounded sharply to.9% Y/Y in April, following a steep decline to.% in previous month. The late timing of Easter caused the monthly volatility. Core inflation unexpectedly jumped higher too, notably to.% Y/Y from.7% Y/Y previously. Services Confidence - Employment Expectations(Left axis) Industrial Confidence - Employment Expectations (Left axis) Unemployment Rate (Right axis) The downtrend in the euro zone unemployment rate continued, even as the unemployment rate stabilized at 9.% in March. Survey evidence suggests that the decline will continue. P.

6 Wednesday, May 7 Euro zone Industrial Production Euro zone Retail Sales -,,,,, Industrial Production Y/Y Retail Sales Y/Y Euro zone industrial production disappointed in February, falling by.% M/M to be up.% Y/Y. The March figure isn t published yet, but Q production will likely disappoint and be in contradiction with the strong survey evidence of activity. We favour the timelier survey evidence. EMU retail sales rose.% M/M in March, after a revised.% M/M in February. On a yearly basis, sales rose.% Y/Y after a revised.7% Y/Y in February. Higher inflation will cap real disposable income, but higher employment and increased optimism may incite households to use their savings or borrow more to spend. Positive Surprise,, Negative Surprise -, - -, Surprise index: measures the difference (in standard deviations) between the (median) Bloomberg consensus and the actual outcome of EMU economic data. Euro zone economic data were mostly better than consensus in the past month, with only consumer confidence and production (outdated) really disappointing. P. 6

7 Wednesday, May 7 US 6 US GDP (Q/Q Annualized - contribution to growth) 6 US ISM Manufacturing - Services 7,, , 8 Personal Consumption Fixed Investments Change in inventories Net Exports Government Consumption US GDP Q/Q Annualized ISM non-manufacturing (Left Axis) ISM Manufacturing (Left Axis) NFIB Small Business Optimism (Right Axis) US growth slowed in Q to.7% Q/Qa, driven by a sharp decline in consumption (.% Q/Qa). Growth in investment slowed to.% Q/Qa and public consumption was down.7% Q/Qa. Inventories subtracted.9% point from growth while net exports were slightly positive. The weak result was likely a one off due to statistical issues US manufacturing ISM business sentiment declined in April to.8 from 7. previously, but remains at decent levels, with strong new orders (7.), but disappointing employment (). The non manufacturing ISM on the contrary accelerated to 7. in April from. previously. The reports suggests strong eco momentum US Inflation,,,, -, - US Unemployment 6, 6,7,,,7,, Manufacturing ISM - prices paid index (Left Scale) US CPI Y/Y (Right Scale) US Core CPI Y/Y (Right Scale) Change in private payrolls (Left Scale) US unemployment rate (Right Scale) US headline inflation slowed to.% Y/Y in March from.7% Y/Y in February as energy prices eased. Core inflation unexpectedly dropped in March by.% M/M to % Y/Y from.% Y/Y previously. Some structural factors (decline telecommunication fares & used car prices) were at play, but shouldn t push overall core prices sustainably lower. The April payrolls report was strong. Net job growth increased by K, above consensus, following an outlier of 79K. The unemployment rate dropped to.% from.% in February. Wages rose a decent.% M/M, but revisions of previous data led to a decline to.% Y/Y from.6% Y/Y previously. P. 7

8 Wednesday, May 7 US Production US Retail Sales,,, -, - 6 US Manufacturing Production Y/Y US industrial production was up a strong.% M/M in March after a tepid.% M/M increase in February. However, it was mainly due to a weather related boost of utility output. Manufacturing output, cyclically more relevant, fell unexpectedly by.% M/M due to a slump in auto production. US retail sales were again weak in March, down.% M/M for the headline and up.% M/M for sales excluding cars and gasoline. It closed a very weak Q for retail sales. A rebound should occur in Q as consumption fundamentals remain intact. On a yearly basis, sales are still up a decent.%.., Positive Surprise, -, - -, Surprise index: measures the difference (in standard deviations) between the (median) Bloomberg consensus and the actual outcome of US economic data. US economic data were again fairly mixed compared to consensus in April/early May, but with a tendency to strengthen most recently. P. 8

9 Wednesday, May 7 Contacts Brussels Research (KBC) Global Sales Force Piet Lammens Brussels Peter Wuyts + 7 Corporate Desk Mathias van der Jeugt Institutional Desk France Dublin Research London Austin Hughes Singapore +6 Shawn Britton Prague Research (CSOB) Jan Cermak Prague + 6 Jan Bures Petr Baca Bratislava Research (CSOB) Marek Gabris Bratislava Budapest Research David Nemeth Budapest 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 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. P. 9