Headlines. Monday, 24 September Rates: FOMC and Italian budget vital this week. Currencies: Dollar decline to slow? Fed policy decision looms.

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1 Rates: FOMC and Italian budget vital this week Trading might be subdued in the run-up to this week s main events: the FOMC meeting and the Italian 2019 budget release. First time forecasts of the 2021 policy rate will determine the short term faith of US yields. We expect the 2021 projection to at least match the 2020 one, keeping upward yield momentum alive. Currencies: Dollar decline to slow? Fed policy decision looms. On Friday, sentiment on risk gradually turned less positive, capping further EUR/USD gains. Today, trade tensions might again become more important for global risk sentiment. USD investors will also make up their mind on the Fed guidance at Wednesday s policy decision. Sterling is again in the defensive as the brexit stalemate persists. Calendar Headlines US equity markets closed last week s trading week mixed, with technology sector underperforming. Asian exchanges opened with losses this morning as well, with Japanese and Chinese markets closed for Autumn celebrations. The US ($200bn) and Chinese ($60bn) tariffs kicked in today with neither sides backing down. Beijing called off talks with the US, planned for this week. Trump repeated his intentions to impose tariffs on all Chinese import (+$256bn). 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 Chaos in the UK. Hard Brexiteers Boris Johnson and David Davis are backing an alternative Canada-style plan challenging May s Chequers-plan. May, on her turn, is said to prepare for a possible election in November to save her job. Iran s president Rouhani will travel to New York on Tuesday to attend the United Nations General Assembly. It remains uncertain whether Rouhani will meet US President Trump, with both countries remaining in deadlock. Trade talks between the US and Japan continue today, after US president Trump and his Japanese counterpart Abe held constructive talks yesterday on trade and the denuclearization process of North Korea. OPEC+ has answered US President Trump s cry for lower oil prices, but failed to deliver specific output volumes. The group said it would boost output only if customers requested it. Oil prices remain elevated, paying almost $80 p/b. Today s eco calendar is very thin, with German IFO business sentiment for September and a speech by ECB president Draghi at a ECON Committee Meeting in Brussels. The US holds a $37bn 2-yr Note auction. P. 1

2 Rates Eyes on FOMC and Italian budget this week US yield -1d 2 2,80 0,00 5 2,95 0, ,06 0, ,20 0,00 DE yield -1d 2-0,53 0,00 5-0,12-0, ,46-0, ,12-0,01 Global core bonds ended mixed last Friday with German Bunds outperforming US Treasuries. The only move worth mentioning an upleg in the Bund occurred after disappointing EMU September PMI data. Q3 PMI s still suggest a growth pace of 0.5% Q/Q, but underlying details show that risks to the future appear tilted to the downside. German yields shifted 0.4 bps (2-yr) to 1 bp (5-yr) lower in a daily perspective. The US yield curve steepened with yield changes ranging between -0.3 bps (2-yr) and +0.4 bps (30-yr). 10-yr yield spread changes vs Germany ended nearly unchanged with Italy outperforming (-4 bps). Asian stock markets cede ground overnight. US stock market sentiment on Friday also dwindled after new all-time opening highs for S&P 500 and Dow. China reportedly denied new trade talks with the US. Regional bourses lose 0.5% to 1.5%, but volumes are low with China and Japan closed due to a public holiday. The US Note future treads water as weakness in stocks is balanced by higher oil prices following OPEC+ s push to keep supply stable rather than increasing it. Brent crude has moved above $80/barrel. Today s eco calendar contains German Ifo business sentiment. Consensus expects a small setback in both current and forward looking readings with risks probably tilted to the downside following last week s PMI s. ECB s Draghi speaks, but he won t alter his message from the September press conference. The US Treasury starts its end-of-month refinancing operation, which could cause some underperformance of US Treasuries vs German Bunds. Overall trading could remain subdued in the run-up to this week s main events though: the FOMC meeting on Wednesday evening and Thursday s release of the Italian 2019 draft budgetary plan. We expect the Fed to hike its policy rate by 25 bps to %. Median forecasts for 2018 (1 additional hike), 2019 (3 hikes) and 2020 (1 hike) will most likely be unchanged given growth and inflationary developments in line with the FOMC scenario. The new rate projection for 2021 will be interesting. We don t think that the Fed will already indicate policy easing by then, suggesting a forecast at least in line with 2020 (3.25%-3.50%). The forecast for the neutral rate (currently 2.875%) will change given the tight call in June and with the firsttime appearance of Fed Vice Chair Clarida. He is rumoured to be an inflation hawk, suggesting a possible increase of the median neutral rate forecast to 3%. Investors might also pay attention to whether or not the Fed calls policy still accommodative in its policy statement. We only expect such change in December in combination with a rate hike to 2.25%-2.50%. Af German 10-yr yield fails to break 0.5% resistance US 10-yr yield: new dot plot will determine about future above or below key resistance P. 2

3 Currencies Dollar decline slows. Focus turns to the Fed. R2 1,2155-1d R1 1,1996 EUR/USD 1,1749-0,0028 S1 1,1510 S2 1,1448 R2 0,9033-1d R1 0,8968 EUR/GBP 0,8982 0,0105 S1 0,8628 S2 0,8548 On Friday, global sentiment was positive for most of the European session. Recent dominating market themes, including uncertainty on trade, stayed low profile. However, this time, the euro couldn t benefit. EMU PMI s showed a manufacturing led decrease but had little impact on trading. The euro ceded ground early in US dealings. This decline accelerated after a statement from UK PM May, confirming the deadlock in the brexit talks. EUR/USD tested the 1.18 area early in the session but turned south later to close the session at A loss of momentum on US equity markets also capped the euro. USD/JPY reversed earlier risk-on gains and finished the day at Overnight, several Asian markets including mainland China and Japan are closed. However, trade tensions are apparently again becoming more important for global trading as China called of a new round of talks with the US. This is weighing on risky assets, including US equity futures. For now the impact on global FX is modest. The HKD is still looking for a new equilibrium after Friday s rally. EUR/USD is hovering in the mid 1.17 area. The yen rallied sharply early this morning, but already returned to Friday s closing levels. Later today, the IFO business confidence is expected to ease moderately (from to 103.2) and ECB s Draghi will speak in Brussels. However, global risk sentiment might become again more important. Markets will also look forward to Wednesday s Fed policy decision. Especially, the 2021 dots might be important for sentiment on interest rate markets and for the dollar. The dollar probably needs a signal from the Fed that the US economic cycle will last long enough to keep 2021 policy rates more or less at the 2020 level. This is possible, but not sure. USD investors might stay in some kind of wait-and- see modus going into Wednesday s policy decision. In a day-to-day perspective, we don t see a strong reason for the dollar to lose further ground beyond EUR/USD On Friday, sterling fell off a cliff as UK PM May had to admit that Brexit negotiations were still in a stalemate. Today and later this week, Brexit will again be the extensively debated within the government/conservative party and at the congress of the labour party. It looks that chances on harder Brexit are on the rise. If so, this might keep sterling in the defensive. A return of EUR/GBP to the 0.91 area might be on the cards. DXY (USD trade-weighted): dollar decline slows ahead of Fed meeting EUR/GBP: sterling hammered as Brexit stalemate persists P. 3

4 Calendar Monday, 24 September Consensus Previous US 14:30 Chicago Fed Nat Activity Index (Aug) :30 Dallas Fed Manf. Activity (Sep) UK 12:00 CBI Trends Total Orders (Sep) :00 CBI Trends Selling Prices (Sep) Germany 10:00 IFO Business Climate (Sep) :00 IFO Expectations (Sep) :00 IFO Current Assessment (Sep) Belgium 15:00 Business Confidence (Sep) Events 15:00 ECB's Draghi Speaks at ECON Committee Meeting in Brussels 19:00 US to Sell USD37 Bln 2-Year Notes SEP UK s Labour Party Conference P. 4

5 10-year Close -1d 2-year Close -1d Stocks Close -1d US 3,06 0,00 US 2,80 0,00 DOW 26743,5 86,52 DE 0,46-0,01 DE -0,53 0,00 NASDAQ 7986,955-41,28 BE 0,79-0,01 BE -0,45-0,01 NIKKEI 23869,93 0,00 UK 1,55-0,03 UK 0,81-0,02 DAX 12430,88 104,40 JP 0,13 0,00 JP -0,11 0,00 DJ euro ,81 27,69 IRS EUR USD GBP EUR -1d -2d USD -1d -2d 3y 0,03 3,04 1,25 Eonia -0,3670-0,0010 5y 0,35 3,07 1,41 Euribor-1-0,3710 0,0010 Libor-1 2,2158 0, y 0,97 3,12 1,63 Euribor-3-0,3190 0,0000 Libor-3 2,3726 0,0063 Euribor-6-0,2680 0,0000 Libor-6 2,5920 0,0071 Currencies Close -1d Currencies Close -1d Commodities Close -1d EUR/USD 1,1749-0,0028 EUR/JPY 132,29-0,19 CRB 193,98 1,27 USD/JPY 112,59 0,10 EUR/GBP 0,8982 0,0105 Gold 1201,30-10,00 GBP/USD 1,3072-0,0193 EUR/CHF 1,1261-0,0032 Brent 78,80 0,10 AUD/USD 0,729-0,0002 EUR/SEK 10,3288-0,0035 USD/CAD 1,2916 0,0013 EUR/NOK 9,5744-0,0170 If you no longer wish to receive this mail, please contact us: to unsubscribe Contacts Brussels Research (KBC) Global Sales Force Mathias Van der Jeugt Corporate Desk(Brussels) Peter Wuyts Institutional Desk(Brussels) Mathias Janssens CBC Desk (Brussels) Dieter Lapeire France Dublin Research London Austin Hughes Singapore Shawn Britton Prague Research (CSOB) Prague Jan Cermak Jan Bures 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. 5