Headlines. Thursday, 22 February Rates: US 10y real interest rate reaches 5-yr high. Currencies: USD nearing first significant resistance area

Transcription

1 KBC Market Research Desk Havenlaan 2, 1080 Brussels Rates: US 10y real interest rate reaches 5-yr high US yields reached new cycle highs in the wake of FOMC Minutes which shifted market bets more towards a hawkish Fed this year. The US 30-yr yield tests first resistance around 3.21%. Interestingly, the latest increase in US yields is spurred by a rising real interest rate rather than by higher inflation expectations. Currencies: USD nearing first significant resistance area The dollar extended gains yesterday as the FOMC minutes were perceived as being on the hawkish side. The dollar is nearing first intermediate resistance. The calendar is rather thin today. In this context, the USD rally might slow. Brexit noise could block the recent (albeit modest) comeback of sterling. Calendar Headlines US markets at first shrugged off FOMC Minutes, but faced selling pressure into the close (-0.5%) as the sell-off in core bonds continued. Asian indices lose ground as well with China outperforming (catch-up after Lunar NY holidays). Federal Reserve officials signalled growing confidence in the US economy when they met in January, bolstering their plans to continue raising short-term interest rates as soon as next month. 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 One of the Federal Reserve's newest policymakers, Quarles, added his voice to the majority at the US central bank calling for interest rate hikes amid rising business optimism and faster growth in the world's biggest economy. The BoJ should consider buying foreign bonds as part of efforts to reflate the economy during Governor Kuroda's second term at the central bank helm, an economic adviser to PM Abe said. The UK s cabinet didn t agree to Theresa May s negotiating strategy for the Brexit transition period before it was sent to EU nations, the Telegraph reported, citing senior ministers. The BoE could end up needing to raise interest rates faster than investors expect, chief economist Haldane told lawmakers, striking a slightly more hawkish tone than his central bank colleagues. Today s eco calendar contains German IFO business sentiment, US weekly jobless claims and details of Q4 UK GDP. Minutes of the previous ECB meeting will be published and Fed Dudley, Bostic and Kaplan speak. P. 1

2 Rates US 10y real interest rate reaches 5-yr high US yield -1d 2 2,27 0,05 5 2,67 0, ,95 0, ,21 0,07 DE yield -1d 2-0,51-0,02 5 0,08-0, ,72-0, ,39-0,02 The German Bund outperformed the US Note future during yesterday s European trading session. A larger-than-forecast setback in the February PMI s (from record levels) generated a small bid in Bunds. The US Note future gyrated up and down near opening levels before selling off in the wake of FOMC Minutes. A majority of Fed officials sounded more upbeat about the economic outlook which raised the likelihood for further gradual policy firming. Some central bankers are also getting more optimist about the inflation outlook while several warned about emerging imbalances in financial markets. The market implied probability of 4 (or more) rate hikes this year rose above 30% for the first time after the Minutes. From a market point of view, the balance of risks is further shifting towards a more hawkish Fed during The US yield curve bear steepened yesterday with yields 3.2 bps (3-yr) to 6.8 bps (30-yr) higher. US yields reached new cycle highs for tenors up until 10-yr. The 30-yr yield is testing first resistance (2016/2017 high at 3.22%). Interestingly, the US 10-yr real interest rate tested 0.8% resistance and temporarily reached the highest level since 2013! The recent increase in US yields is driven by rising real interest rates rather than by higher inflation expectations. German yields declined by 0.6 bps (5-yr) to 2.1 bps (30-yr). Spreads vs Germany ended nearly unchanged apart from Greece (+6 bps) and Portugal (-4 bps). The US Note future rebounds somewhat off yesterday s sell-off low. New Washington-based governor Quarles suggested this morning that the neutral rate in the US is increasing again, but markets didn t pick-up the signal (yet). Today s eco calendar contains German Ifo business sentiment, ECB Minutes and weekly jobless claims. We don t expect them to impact trading. A speech by voting Fed-governor Bostic has most market-moving potential. He is in favour of 2 or 3 rate hikes this year and previously suggested that the neutral rate is around 2%. A shift towards 3 hikes in 2018 or a higher neutral rate won t go unnoticed. Core bond sentiment remains negative with US Treasuries underperforming German Bunds. Strong growth momentum, rising inflation (expectations), higher real rates and the global turn towards monetary policy normalization are structurally negative factors for core bonds medium term. US and German yields cleared resistance levels earlier this year and are moving towards next targets. 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%. A US Note future (intraday, this week): latest sell-off started in the wake of FOMC Minutes US 10-yr real rate tests 1 st resistance and sets new high since 2013 P. 2

3 Currencies USD nearing first resistance R2 1,2598-1d R1 1,2555 EUR/USD 1,2284-0,0053 S1 1,2206 S2 1,2165 R2 0,9307-1d R1 0,9033 EUR/GBP 0,8825 0,0010 S1 0,8690 S2 0,8657 The dollar gained further ground yesterday, but initially it occurred only at a snail s pace. EMU PMI s disappointed, but had hardly any negative impact on the euro. The EUR/USD decline even stalled early in US dealings. Markets hesitated which way to go after the release of the Fed Minutes. Finally the coin fell to the hawkish side. US bond yields rose further and so did the dollar. EUR/USD dropped below the 1.23 mark and closed the session at USD/JPY closed at , within reach of the intraday top even as US equities came under pressure at the end of the session. The trade-weighted dollar closed the day exactly at (compared to last week s low of 88.25). The calendar is moderately interesting today. The German IFO Business climate is expected to ease from to 117. Yesterday, the PMI s declined more than expected and this might also be the case for the IFO. The PMI release triggered a modest intraday decline in EMU yields, but hardly affected the euro. There are plenty of Fed speakers, the ECB publishes the account of the January meeting and the US Treasury sells 7-yr bonds. We don t see any of these factor containing a trigger for a big USD move. LT US yields are nearing (10y)/testing (30y) key resistance levels. It probably needs high profile news to go for a test/break. In this context, the recent USD rebound might also slow is first resistance for the trade-weighted dollar. First support in EUR/USD (1.2206/1.2165) is coming on the radar. In a day-today perspective, we think it might be a bit too early for a test/break. The gradual rebound of sterling ran into resistance yesterday. The UK currency returned part of Tuesday s gain after mediocre UK labour data. Brexit noise remained a negative, too. BoE governors, including Carney, indicated that further rate hikes are on the cards in a hearing before parliament. However they deliberately remained vague on the timing. EUR/GBP returned south to the low area, but a test of the 0.88 big figure didn t occur. Details of the UK Q4 GDP and the CBI retail data will be published today. PM May and 11 top Ministers meet to clarify the Brexit strategy. Consensus still looks far away. We see little upside for sterling (against the euro) as long as Brexit uncertainty remains as high as it is. EUR/USD: drifting back south in the / ST range EUR/GBP: correction off slows on Brexit uncertainty P. 3

4 Calendar Thursday, 22 February Consensus Previous US 14:30 Initial Jobless Claims 230k 230k 14:30 Continuing Claims 1935k 1942k 17:00 Kansas City Fed Manf. Activity (Feb) UK 10:30 Index of Services MoM / 3M/3M(Dec) 0.0%/0.5% 0.4%/0.4% 10:30 GDP QoQ / YoY (4Q P) 0.5%/1.5% 0.5%/1.5% 10:30 Total Business Investment QoQ / YoY (4Q P) 0.4%/2.4% 0.5%/1.7% 10:30 Private Consumption QoQ (4Q P) 0.4% 0.5% 10:30 Government Spending QoQ (4Q P) 0.3% -0.2% 10:30 Gross Fixed Capital Formation QoQ (4Q P) 0.5% 0.3% 10:30 Exports QoQ / Imports QoQ (4Q P) 0.2%/1.1% 0.8%/0.9% 12:00 CBI Retailing Reported Sales (Feb) :00 CBI Total Dist. Reported Sales (Feb) Germany 10:00 IFO Business Climate (Feb) :00 IFO Expectations (Feb) :00 IFO Current Assessment (Feb) France 08:45 Business Confidence (Feb) :45 CPI EU Harmonized MoM / YoY (Jan F) -0.1%/1.5% -0.1%/1.5% Italy 10:00 Industrial Orders MoM / NSA YoY (Dec) --/-- 0.3%/8.9% 11:00 CPI EU Harmonized YoY (Jan F) 1.1% 1.1% Belgium 15:00 Business Confidence (Feb) Events 06:15 Fed s Quarles to Speak on Global Economy 13:30 ECB Publishes Account of Jan Policy meeting 16:00 Fed s Dudley to Speak at New York Fed Briefing on Puerto Rico 18:10 Fed s Bostic Speaks at Banking Conference in Atlanta 19:00 US to Sell $29 bn 7-yr Notes 21:30 Fed Kaplan Speaks on Trade Panel in Vancouver P. 4

5 10-year Close -1d 2-year Close -1d Stocks Close -1d US 2,95 0,06 US 2,27 0,05 DOW 24797,78-166,97 DE 0,72-0,01 DE -0,51-0,02 NASDAQ 7218,228-16,08 BE 1,03-0,01 BE -0,46 0,00 NIKKEI 21736,44-234,37 UK 1,56-0,03 UK 0,68 0,00 DAX 12470,49-17,41 JP 0,06 0,00 JP -0,15 0,00 DJ euro ,16-4,92 IRS EUR USD GBP EUR -1d -2d USD -1d -2d 3y 0,09 2,68 1,19 Eonia -0,3680 0,0010 5y 0,50 2,82 1,39 Euribor-1-0,3700 0,0000 Libor-1 1,5956 0, y 1,13 2,98 1,65 Euribor-3-0,3290 0,0000 Libor-3 1,9039 0,0000 Euribor-6-0,2710 0,0020 Libor-6 2,1286 0,0000 Currencies Close -1d Currencies Close -1d Commodities Close -1d EUR/USD 1,2284-0,0053 EUR/JPY 132,39-0,02 CRB 194,17 0,50 USD/JPY 107,78 0,45 EUR/GBP 0,8825 0,0010 Gold 1332,10 0,90 GBP/USD 1,3918-0,0078 EUR/CHF 1,1535-0,0016 Brent 65,42 0,17 AUD/USD 0,7804-0,0079 EUR/SEK 9,9731-0,0155 USD/CAD 1,2703 0,0055 EUR/NOK 9,6653-0,0078 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 Brussels Peter Wuyts Corporate Desk 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. 5