Tuesday, 13 March 2018 Headlines US stock markets parted ways yesterday Risk sentiment on Asian stock markets is mixed overnight

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1 Rates: US CPI won t shift thinking about next week s FOMC Focus turns to US CPI today. We don t think that the outcome, even in case of a disappointment, will dramatically shift expectations about next week s Fed meeting. Greek bonds could outperform after yesterday s Eurogroup meeting, while SLOVGB s might underperform on the developing political crisis. BTP auctions are a good test for appetite. Currencies: Soft ECB speak caps EUR/USD topside The dollar was still looking for a clear direction yesterday. Soft ECB comments prevented a sustained rise in EUR/USD. The US CPI takes center stage today. A positive surprise might support the dollar, but it is not sure that this surprise will already come this month. Sterling is trading off recent lows as Brexit is (temporary) off the radar. Calendar Headlines US stock markets parted ways yesterday with only Nasdaq ending with gains. Risk sentiment on Asian stock markets is mixed overnight with China underperforming (-0.5%). President Trump blocked Broadcom s $117 bn hostile bid for Qualcomm, capping moves by the Trump administration reflecting concerns about an intensifying arms race between the US and China over advanced technologies. S&P Eurostoxx 50 Nikkei Oil CRB Gold 2 yr US 10 yr US 2yr DE 10 yr DE EUR/USD USD/JPY EUR/GBP Slovakia s government edged towards break-up after one of the junior parties in the ruling coalition of PM Fico called for early elections to stem the furore over the murder of an investigative journalist. (FT) China is merging its banking and insurance regulators and creating a slew of ministries including a new agricultural and rural affairs ministry as part of the biggest government shake-up in years. EMU creditors will disburse new loans to Greece this month and are working on debt relief measures, the head of the Eurogroup Centeno said. Those moves should help strengthen the Greek recovery. Japan's FM Aso is considering skipping a G-20 finance leaders' gathering in Buenos Aires next week, Japanese media reported, as a suspected cover-up of a cronyism scandal paralyses parliament and puts his job on the line. Today s eco calendar contains US NFIB small business optimism and US CPI data. The Netherlands, Italy and the US tap the bond market. P. 1

2 Rates Tuesday, 13 March 2018 US CPI won t shift thinking about next week s FOMC US yield -1d 2 2,26 0,00 5 2,64-0, ,87-0, ,14-0,03 DE yield -1d 2-0,57-0,02 5 0,01-0, ,63-0, ,28-0,02 Core bonds eked out some gains in a low-volume opening session of the week. The eco calendar was empty. Dovish comments by ECB governors Coeuré and Smets lifted the Bund early in the European session. The US Note future made a catch-up move in US dealings after the US Treasury passed the double auction test ($28bn 3-yr Notes and $21bn 10-yr Notes). The US yield curve bull flattened at the end of the day with US yields 0.3 bps (2-yr) to 2.8 bps (30-yr) lower. German yields dropped by 1.5 bps to 1.8 bps across the curve. 10-yr yield spread changes vs Germany ended nearly unchanged. Greek bonds could outperform today after the Eurogroup decided yesterday to disburse 5.7bn this week. Head of the EMU FM s, Centeno, added that they started working on granting Greece additional debt relief after the country s exit from the bailout programme in August. Slovak bonds could feel pressure from the developing political crisis after junior coalition partner (Most) called for early elections. Finally, today s Italian BTP auction will be a good test for investor s appetite after last week s parliamentary vote produced a hung parliament. The US Note future trades marginally lower, but we don t draw big conclusions for the Bund s opening. Today s eco calendar only contains US eco data with NFIB small business optimism, but mainly US February CPI data. Headline inflation is expected to print at 0.2% M/M and 2.2% Y/Y (from 2.1% Y/Y); rising further above the Fed s 2% target. Core inflation is forecast to stabilize at 1.8% Y/Y. Last week s disappointing wage data cast a shadow over today s print. However, we don t think that market expectations about next week s Fed meeting will dramatically shift even in case of below-consensus outcome. The shift in tone by heavyweight Fed-governors could translate into a higher estimate for the neutral rate with risks for a faster hike cycle. That could eventually cause a test of the 3.05% area towards the end of this month. Any upticks in the US Note future (eg towards the 121-level) could therefore be used to add short positions. Today s 30-yr US bond auction is a wildcard. A good outcome could also temporarily relieve downward pressure on US Treasuries. Technically, the trading band for the US 10-yr yield is 2.64%-3.05%. The German 10-yr yield s trading band is 0.62%-1.06%. The downside survived on two separate occasions last week, including after the dovish interpreted ECB meeting. That strengthens the support and our belief in setting up short Bund positions around this level. A German Bund approaches resistance which coincides with 0.62% support in the German 10-yr yield US Note future (YTD): hoverning in narrow channel near the sell-off lows P. 2

3 Currencies Soft ECB speak caps EUR/USD topside R2 1,2598-1d R1 1,2555 EUR/USD 1,2334 0,0027 S1 1,2165 S2 1,2055 R2 0,9307-1d R1 0,9033 EUR/GBP 0,8871-0,0015 S1 0,8690 S2 0,8657 Risk sentiment stayed constructive yesterday after Friday s almost perfect payrolls. Still, the dollar didn t find a clear direction. EUR/USD hovered in the lower half of the 1.23 big figure. The topside in EUR/USD is apparently rather well protected as the market assumes that any ECB normalization will develop in a very gradual way. This was confirmed by soft comments from ECB Smets and Coeuré. EUR/USD closed the day at USD/JPY held in the mid 106 area. Overnight, Asian equities are trading mixed. Changes in the major indices are modest. Markets don t give too much weight to the political tensions in Japan. The Nikkei regained initial losses and this propelled USD/JPY. The dollar also regains a few ticks against the euro. The Aussie dollar is holding near it ST top ( area) on constructive eco data. Today, the US NFIB small business confidence is interesting, but the focus will be on the February US CPI data. The consensus expects 0.2% M/M and 2.2% Y/Y (from 2.1%) for headline CPI. The core reading is expected unchanged at 1.8% Y/Y. We don t see much reason for a big positive surprise for the February data. This evening, the US treasury sells 30-yr bonds. Yesterday s sale of 10-y Treasuries was OK. For now, US data don t provide much new guidance for the dollar (and for interest rates) going into the March 21 Fed meeting. We also monitor comments from ECB members. In the wake of last week s ECB meeting (Draghi s comments were perceived soft), comments of ECB s Smets and Coeuré pointed in the same direction. So, ST a further decline in EUR/USD maybe has to come from the euro side of the story, rather than from the USD. Especially as the market is probably still positioned a bit euro long. The US tariffs/trade debate remains a wildcard. The post ECB price action suggests that the EUR/USD topside is rather well protected. Constructive US eco data might cause a renewed EUR/USD test of the area. Sterling traded with a cautiously positive bias yesterday. There are again no UK eco data today. Markets keep an eye at Fin Min Hammond s half year public finance update. Less focus on austerity might be a slightly positive for sterling, but it won t be a game-changer. For now there is no trigger for a clear directional move in EUR/GBP. Some further range trading near current levels might be in the cards. EUR/USD still looking for a directional impetus. Will US CPI provide a trigger? EUR/GBP: sterling regains slightly ground as Brexit noise eases P. 3

4 Calendar Tuesday, 13 March Consensus Previous US 11:00 NFIB Small Business Optimism (Feb) :30 CPI MoM / YoY (Feb) 0.2%/2.2% 0.5%/2.1% 13:30 CPI Ex Food and Energy MoM / YoY (Feb) 0.2%/1.8% 0.3%/1.8% 13:30 Real Avg Hourly/Weekly Earnings YoY (Feb) --/-- 0.8%/0.4% Japan 00:50 PPI MoM / YoY (Feb) A:0.0%/2.5% 0.3%/2.7% Italy 10:00 Unemployment Rate Quarterly (4Q) 11.0% 11.2% Spain 09:00 CPI EU Harmonised MoM / YoY (Feb F) 0.1%/1.2% 0.1%/1.2% Events 11:00 Netherlands to Sell Up to 6bn 0.75% 2028 Bonds 11:00 Italy to Sell Up to 0.2% 2020, 1.45% 2025, 2.45% 2033 and 2.7% 2047 Bonds 18:00 US to Sell $13bn 30-yr Bonds 10-year Close -1d 2-year Close -1d Stocks Close -1d US 2,87-0,03 US 2,26 0,00 DOW 25178,61-157,13 DE 0,63-0,02 DE -0,57-0,02 NASDAQ 7588,325 27,51 BE 0,91-0,02 BE -0,52-0,01 NIKKEI 21968,1 144,07 UK 1,49 0,00 UK 0,83 0,00 DAX 12418,39 71,71 JP 0,06 0,00 JP -0,14 0,00 DJ euro ,48 8,94 IRS EUR USD GBP EUR -1d -2d USD -1d -2d 3y 0,07 2,69 1,20 Eonia -0,3630-0,0020 5y 0,44 2,79 1,38 Euribor-1-0,3700 0,0010 Libor-1 1,7503 0, y 1,07 2,91 1,61 Euribor-3-0,3270 0,0000 Libor-3 2,0888 0,0000 Euribor-6-0,2710 0,0000 Libor-6 2,2686 0,0000 Currencies Close -1d Currencies Close -1d Commodities Close -1d EUR/USD 1,2334 0,0027 EUR/JPY 131,26-0,20 CRB 194,53-0,62 USD/JPY 106,42-0,40 EUR/GBP 0,8871-0,0015 Gold 1320,80-3,20 GBP/USD 1,3906 0,0056 EUR/CHF 1,1688-0,0023 Brent 64,95-0,54 AUD/USD 0,7873 0,0029 EUR/SEK 10,1651 0,0182 USD/CAD 1,2842 0,0030 EUR/NOK 9,5525-0,0250 If you no longer wish to receive this mail, please contact us: kbcmarketresearch@kbc.be to unsubscribe Contacts P. 4

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