Headlines. Thursday, 13 July Rates: Counting down to tomorrow s US eco data. Currencies: Dollar stays soft post-yellen.

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1 Rates: Counting down to tomorrow s US eco data Today s eco calendar won t inspire trading. In light of most recent events (Yellen s Testimony), we expect that core bonds could correct somewhat higher without eking out technically relevant levels ahead of tomorrow s important US eco releases (CPI & retail sales). Currencies: Dollar stays soft post-yellen The dollar was in the defensive ahead of Yellen s testimony before Congress. This picture didn t change as markets focus on Yellen s inflation comments. EUR/USD stabilizes near the recent top. USD/JPY corrects south. The dollar needs outright good news and that probably won t come today. The focus turns to tomorrow s US CPI and retail sales. Calendar Headlines 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 US stock markets gained up to 1.1% after Fed Yellen s testimony suggested that the central bank gives some additional weight to disappointing inflation, suggesting a slow tightening cycle. Asian markets copy WS overnight. China reported better-than-expected June trade data, suggesting the economy is holding up well thanks to firmer global demand, despite a cooling property market at home amid a financial crackdown that has put firms under pressure. The US economy expanded at a slight to moderate rate in June, with the labour market continuing to tighten and price growth still modest, the Federal Reserve said in its anecdotal Beige Book report. The Bank of Korea held its seven-day repo rate unchanged at 1.25%, after last cutting rates by 25 bps in June The Korean won firmed though as the BoK upgraded GDP forecasts. Senate Majority Leader McConnell faced intensifying pressure from President Trump to push through a health-care overhaul next week, but he appeared to make little progress in bridging the deep divides imperilling his party. The German government has expanded its powers to block the takeover of German companies amid growing concerns in Berlin at the scale of Chinese deal making in the German high-tech sector. Today s eco calendar is thin with only final national EMU inflation data, US weekly jobless claims and US PPIO. It s the second day of Yellen s testimony before US Congress and Therese May presents her Repeal Bill to UK parliament. The US, Ireland and Italy tap the market. P. 1

2 Rates Yellen subtle inflation warning lifts US Treasuries Subtle change on inflation supports core bonds More evidence from policy normalization: Bank of Canada US yield -1d 2 1,34-0,03 5 1,87-0, ,32-0, ,87-0,04 DE yield -1d 2-0,62-0,02 5-0,12-0, ,58 0, ,32-0,03 Global core bonds gained ground yesterday after the release of Fed chair Yellen s written statement for US Congress. US Treasuries outperformed German Bunds. While her statement was nearly a copy from the June policy statement (balance sheet tapering will start soon, more gradual rate hikes will follow in coming years), investors focused on a modest warning on inflation. The Fed chief noted declines in "certain categories of prices," while such weakness was last month considered as "transitory." Additionally, she emphasized the lower neutral rate, suggesting no rush with the tightening cycle. The Bank of Canada hiked rates for the first time since 2010 and confirms our reasoning that global central banks embrace a new stage in the monetary cycle: policy normalisation. Yellen s testimony overshadowed the BoC s decision though, which only impacted local markets. At the end of the session, the US yield curve declined by 3.2 bps (2-yr) to 4.3 bps (10-yr). The German yield curve bull flattened with yields 2.1 bps (2-yr) to 3.1 bps (30-yr) lower. The 10-yr yield added 2.9 bps, but that was due to a benchmark change. Uneventful eco calendar Today s eco calendar is thin. It s the second day of Fed chair Yellen s testimony in US Congress (Senate Committee), but normally she will stick to yesterday s line. Fed Brainard touches on monetary policy, but she already stroke a dovish note earlier this week. Final national EMU inflation data, US weekly jobless claims and US PPI data will be released. In light of recent development, only the latter seem to have market moving potential. Especially a lower-than-expected outcome could spook markets. Consensus expects a 0.2% M/M and 1.9% Y/Y reading in June for the headline PPI and 0.2% M/M and 2% Y/Y for the core reading. We have no reason to distance ourselfves from consensus. US Note future (orange) and S&P index (black) (intraday): Bonds and stocks profit from subtle inflation warning by Fed chair Yellen Bank of Canada policy rate: first rate hike since 2010 is more evidence of global policy normalisation P. 2

3 Italy, Ireland and US tap market R2 164,13-1d R1 161,68 BUND 161,42 0,73 S1 160,17 S2 159,1 The Italian debt agency taps the on the run 3-yr BTP ( B 0.35% Jun2020), 7-yr BTP ( 2-2.5B 1.85% May2024), 15-yr BTP (2.45% Sep2033) and off the run BTP (4% Feb2037). The joint supply range for those last two BTP s is 1.5-2B. The bonds didn t cheapen in ASW spread terms going into the auction and the on the run BTP s sit rather rich on the Italian curve. We expect plain vanilla demand. The Irish treasury (NTMA) taps two on the run bonds for a combined 0.75B: 0.8% Mar2022 and 2% Feb2045. The NTMA has issued 8.75B bonds so far this year, compared to its stated target range of 9-13B in the bond markets. Both bonds traded stable in ASW spread terms going into the auction and are normal on the Irish curve. We expect a decent auction. The US Treasury continued its mid-month refinancing operation with an average $20B 10-yr Note auction. There was a small tail and the bid cover (2.45) was close to average. Bidding details showed typical direct and indirect bids and a weak dealer bid. The Treasury ends its refinancing operation tonight with a $12B 30- yr Bond auction. Currently, the WI trades around 2.88%. Counting down to tomorrow s US eco data Overnight, Asian stock markets trade positive in line with yesterday s WS gains. Japan (flat) lags behind. The US Note future is marginally higher; but we expect a neutral opening for the Bund. Today s eco calendar (see above) won t inspire trading. In light of most recent events (Yellen s testimony; US political upheaval), we expect that core bonds could correct somewhat higher without eking out technically relevant gains ahead of tomorrow s important US eco releases (CPI & retail sales). From a technical point of view, the T-Note remained above the key /01+ support area (neckline double top/62% retracement) last week while the German Bund fell below similar support (now resistance) at /58. Next support stands at If broken, this could point to a full retracement towards We hold our longer term sell-on-upticks strategy in both the Bund and US Note future as markets reposition for a new stage in the global monetary cycle: policy normalisation (eg Bank of Canada s rate hike yesterday). The peak of central bank dovishness is behind us. German Bund: Sell-off pushed the Bund below the /58 support (neckline double top & 62% retracement), making the technical picture bearish US Note future: Some cracks in technical picture, but the 124/12/01+ key support (neckline double top & 62% retracement) remained out of sight P. 3

4 Currencies USD declines further on political noise Mixed dollar reaction as Fed keeps a close eye on inflation R2 1,1616-1d R1 1,15 EUR/USD 1,1412-0,0055 S1 1,1119 S2 1,0839 Asian equities rebound post- Yellen Dollar remains in the defensive, with USD/JPY hit the hardest EUR/USD holds within reach of correction top Eco calendar is modestly interesting Dollar to stay soft going into tomorrow s key data? The dollar started the session on a weak footing yesterday as markets pondered the potential fall-out from the Trump Jr. s. Gradually, the focus turned to Yellen s statement before Congress. Yellen stayed close to the Fed s assessment from June, but indicated that soft inflation needs close monitoring. The USD reaction was mixed. USD/JPY stayed under pressure even as equities rallied. The pair closed the session at EUR/USD reversed an initial topside test to finish the day at Asian equities join the post-yellen rebound on WS, but there is a loss of momentum as the session evolves. Strong Chinese foreign trade data (both imports and exports stronger than expected) are supporting Chinese and Australian markets. Chinese data and an overall soft dollar propelled AUD/USD close to the 0.77 mark. USD/JPY underperforms despite recent attempts by the BoJ to cap the rise in Japanese yields. USD/JPY hovers in the low 113 area. EUR/USD trades in the area, holding within reach of the recent top. Today, there are again only second tier eco data in Europe. In the US, jobless claims and the PPI producer prices will be published. Headline and core PPI are expected to rise 0.2% M/M, but Y/Y-measures are expected to ease to 1.9% and 2.0% respectively. The focus will be on tomorrow s key US data (CPI, retail sales, Michigan confidence). However, disappointing PPI data might keep the dollar in the defensive. Yellen will bring the second part of her semi-annual testimony before the Senate. Fed s Brainard will also speak. She spoke rather soft of late. Dollar sentiment remained fragile after Friday s payrolls. The potential political fall-out Donald Trump Jr s leaked s was an additional source of USD caution. Yesterday s assessment of Fed s Yellen before Congress was balanced, but the market gave most weight to some pockets of Fed softness on inflation. This keeps the dollar in the defensive, even as the reaction was slightly different across USD cross rates. We expect USD softness to persist going into tomorrow s US CPI and retail sales. The dollar needs outright good news to succeed a sustained rebound and this news probably won t to come today, keeping the dollar near the recent lows. US politics remain a wildcard. Of late, the political headlines were USD negative. We also keep a close eye on whether Congress can reach a deal on healthcare in the near future. If realized, the political context might become less USD negative. For now, this is only hypothetical thinking and it is too early to play this card in a daily perspective. EUR/USD stays near correction top post-yellen on broad-based USD softness USD/JPY: test of correction top rejected P. 4

5 Technical picture: USD looking for a bottom A combination of hawkish ECB comments and soft US data pushed EUR/USD above the /66 resistance area end June. The payrolls were not good enough to trigger a sustained USD rebound. Next resistance in the 1.15 area is looming. LT-correction tops stand at / A break would end the long consolidation period that followed the sharp decline of EUR/USD in 2014/early Such a key area will be difficult to break for now. A return below the 1.13 area would be a first indication of a loss in upside momentum. EUR/USD /10 is the next important support. The USD/JPY rally ran into resistance in early May and the pair returned lower in the / range. The post-fed USD rebound pushed the pair above the correction top, but follow-through gains remain modest. USD/JPY resistance was tested, but for now the test is rejected. This at least suggests a pause in the recent USD/JPY uptrend. We stay cautious on USD/JPY long positions despite the recent good performance. R2 0,9142-1d R1 0,9049 EUR/GBP 0,8857-0,0068 S1 0,8757 S2 0,8652 Brexit to return as factor for sterling trading? Sterling was again in better shape yesterday after a sharp correction on Tuesday. The May UK labour market report was solid. The unemployment rate dropped to a multi-decade low of 4.5% and job growth was stronger than expected. Weekly earnings rose modestly from 1.8% Y/Y to 2.0% Y/Y (1.9% Y/Y was expected). This leaves real wage growth negative given a May inflation reading of 2.9%. The jury is still out what this means for the August BoE policy decision, but the report was good enough to trigger profit taking on sterling shorts. EUR/GBP returned below the 0.89 barrier and closed the session at , reversing most of Tuesday s gain. Cable also rebounded, partially supported by underlying USD softness. The pair finished the day at Overnight, the UK RICS house price balance was weaker than expected (7% vs. 15%). The report has little impact on sterling trading. Markets will keep a close eye of the Brexit Repeal Bill. This will provide the groundwork for post-brexit UK legislation. The approval will be key for May s political fate. Of late, Brexit and political issues were only of second tier importance for sterling trading. Political uncertainty might return to the forefront, at least temporary. From a technical point of view, EUR/GBP set a minor top north of /66 resistance (2017 top), but initially a sustained break didn t occur. However, a sharp short-squeeze propelled the pair north of 0.89 earlier this week. Quite some sterling negative news should already be discounted at current levels. Even so, the short-term trend remains euro positive/sterling negative. A test of the 0.90 barrier might be on the cards. EUR/GBP technical break higher needs to be confirmed GBP/USD balance of both USD softness and sterling weakness P. 5

6 Calendar Thursday, 13July Consensus Previous US 14:30 Initial Jobless Claims 245k 248k 14:30 Continuing Claims 1950k 1956k 14:30 PPI final demand M/M Y/Y (June) 0%/1.9% 0%/2.4% 14:30 PPI ex food & energy M/M Y/Y (June) 0.2%/2% 0.3%/2.1% China 04:01 Foreign Direct Investment YoY (June) A: 2.3% -3.7% 05:20 Exports YoY CNY (June) A: 17.3% 15.5% 05:20 Imports YoY CNY (June) A: 23.1% 22.1% 05:20 Trade Balance CNY (June) A: b b 05:22 Exports YoY (June) A: 11.3% 8.7% 05:22 Imports YoY (June) A: 17.2% 14.8% 05:22 Trade Balance (June) A: $42.80b $40.79b UK 01:01 RICS House price balance (Jun) A: 7% 17% 10:30 BOE credit conditions & bank liabilities surveys Germany 08:00 HICP inflation M/M Y/Y(June F) 0.2%/1.5% 0.2%/1.5% France 08:45 HICP inflation M/M Y/Y(June F) 0%/0.8% 0%/0.8% Spain 09:00 HICP inflation M/M Y/Y(June F) 0%/1.6% 0%/1.6% Sweden 09:30 CPI M/M Y/Y (June) 0%/1.6% 0.1%/1.7% 09:30 CPI core M/M Y/Y (June) -0.1%/1.7% 0.1%/1.9% Events Theresa May presents lawmakers her Repeal Bill 11:00 Italy to Sell 0.35% 2020, 1.85% 2024, 2.45% 2033 and 4% 2037 BTP s 11:30 Ireland to Sell 0.8% 2022 and 2% 2045 Bonds 15:30 Fed Yellen testifies for Senate banking panel 19:00 Fed Brainard speaks in Cambridge 19:00 US to Sell $12B 30-yr Bonds P. 6

7 10-year Close -1d 2-year td -1d Stocks Close -1d US 2,32-0,04 US 1,34-0,03 DOW 21532,14 123,07 DE 0,58 0,03 DE -0,62-0,02 NASDAQ 6261,171 67,87 BE 0,86-0,05 BE -0,49-0,02 NIKKEI 20099,81 1,43 UK 1,26-0,01 UK 0,30 0,01 DAX 12626,58 189,56 JP 0,08-0,01 JP -0,12-0,01 DJ euro ,23 50,75 IRS EUR USD GBP EUR -1d -2d USD -1d -2d 3y 0,01 1,73 0,76 Eonia -0,3590 0,0010 5y 0,30 1,95 0,95 Euribor-1-0,3740 0,0000 Libor-1 1,2239 0, y 0,93 2,27 1,32 Euribor-3-0,3310 0,0000 Libor-3 1,3035 0,0000 Euribor-6-0,2730 0,0000 Libor-6 1,4627 0,0000 Currencies Close -1d Currencies Close -1d Commodities Close -1d EUR/USD 1,1412-0,0055 EUR/JPY 129,14-1,51 CRB 173,88-0,05 USD/JPY 113,17-0,77 EUR/GBP 0,8857-0,0068 Gold 1219,10 4,40 GBP/USD 1,2885 0,0037 EUR/CHF 1,1016-0,0035 Brent 47,74 0,22 AUD/USD 0,7678 0,0040 EUR/SEK 9,6056-0,0274 USD/CAD 1,2751-0,0164 EUR/NOK 9,4533-0,0395 Contacts Brussels Research (KBC) Global Sales Force Piet Lammens Brussels Peter Wuyts Corporate Desk Mathias van der Jeugt Institutional Desk Dublin Research France Austin Hughes London Shawn Britton Singapore Prague Research (CSOB) Jan Cermak Prague 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 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. 7