Headlines. Monday, 14 May Rates: Sideways trading ahead. Currencies: USD rally slows after modest US CPI. Calendar

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1 Rates: Sideways trading ahead Last week s consolidation on core bond markets is expected to continue at the start of the trading week given the thin eco calendar. Central bankers are expected to confirm recent guidance on monetary policy. Italian political developments are expected to weigh on BTP s, but shouldn t influence global sentiment. Currencies: USD rally slows after modest US CPI At the end of last week, the dollar lost slightly ground. A modest US CPI report slowed the recent rise in US yields and in the dollar. The subsequent risk-on context was also a slightly USD negative. The eco calendar is thin today. Despite a rather soft US CPI, we don t see a trigger for a protracted rebound in EUR/USD at this moment. Calendar Headlines US stock markets ended mixed on Friday with Dow Jones putting a slightly better performance (+0.4%). Most Asian equity indices trade positive overnight with China outperforming (+1%). Italy s leading populist parties are within striking distance of forming a government in the EMU s third-largest economy after reaching tentative agreement on a common platform but not on a choice of prime minister. (FT) 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 The US threatened to impose sanctions on European companies that do business with Iran, as the remaining participants in the Iran nuclear accord stiffened their resolve to keep that agreement operational. (Reuters) The UK must spell out plans for post-brexit co-operation on foreign and security policy before next month s European Council if it is to live up to its goal of continuing to work closely with its EU allies, lawmakers said (BB). Andrej Babis s Ano party and the Czech Social Democrats have agreed a draft coalition agreement, edging the Czech Republic closer to a government nearly seven months after an inconclusive parliamentary election. (FT) St. Louis Fed Bullard (dove) spelled out the case against any further interest rate increases, saying rates may already have reached a "neutral" level that is no longer stimulating the economy. (Reuters) Today s eco calendar only contains second tier eco data, but a lot of central bank governors are scheduled to speak. P. 1

2 Rates Consolidation on core bond markets US yield -1d 2 2,53 0,00 5 2,83 0, ,97 0, ,10 0,00 DE yield -1d 2-0,58 0,00 5-0,06 0, ,56 0, ,24 0,00 Core bonds ended close to unchanged Friday in an uneventful trading session. US eco data were mixed with strong May University of Michigan consumer confidence, but import prices rising less than forecast. US yields added up to 0.9 bps (5-yr). The yield curve flattened slightly further with the 2y10y spread declining to 42 bps, the lowest since Peripheral yield spreads vs Germany narrowed by 4 to 7 bps with Italy (-1 bp) underperforming as a populist government between Lega and 5SM is taking shape. The US Note future is slightly upwardly oriented this morning despite positive risk sentiment on Asian stock markets. Brent crude is slightly lower, but remains close to the cycle highs. We expect a neutral opening for the Bund. Today s eco calendar only contains second tier eco data, suggesting sentimentdriven trading. Speeches by central bank governors are wildcards with especially a lot of ECB governors on the agenda. Recent talk suggests that the ECB will wait until July to communicate on the future/end of its APP programme. Markets might therefore be less sensitive to today s comments. Italian BTP s could continue to underperform because of political developments, but we don t expect them to influence global sentiment via the risk channel. The eco calendar remains rather thin for the remainder of the week. We don t expect strong directional moves on core bond markets today. Medium term: the ECB and Fed signaled no haste in respectively starting the normalization process and stepping up the gradual tightening cycle suggesting consolidation on rate markets going into June policy meetings, unless of course eco data are that strong to overrule them Technically, The German 10-yr yield bounced off key support levels (0.46%/0.48%), suggesting a return higher in the range with upper bound at 0.80%. The US 10-yr yield rose temporary above 3%, but a real test of 3.07% resistance didn t occur yet. Af US 10-yr yield: flirting with 3% mark German 10-yr yield bounced off key support area early April, suggesting consolidation ahead P. 2

3 Currencies R2 1,2598-1d R1 1,2555 EUR/USD 1,1943 0,0028 S1 1,1812 S2 1,1718 R2 0,9307-1d R1 0,9033 EUR/GBP 0,8818 0,0004 S1 0,8627 S2 0,8541 USD running into resistance after modest US CPI. Thursday s softer than expected US CPI caused some kind of change in the mind-set on global markets. The report was close to consensus, but convinced markets that the Fed won t change its gradual path to policy normalisation. This slowed the rise in US yields and in the dollar and supported equities. EUR/USD rebounded to close the week at USD/JPY tested the 110 area on Thursday, but closed at Overnight, last week s trends continue in Asia. Asian equities mostly show modest gains and US equity futures suggest that the US equity rally might continue. USD/JPY hovers in the lower half of the 109 big figure. EUR/USD revisited last week s correction top in the area, but no follow-through gain occurred. Euro investors probably keep an eye at the political developments in Italy as the 5SM and League parties are making good progress to reach an agreement to form a government. Today, there are few eco data in Europe or in the US, but several ECB and Fed members will speak. Investors will also keep an eye at the geopolitical developments. Tension in Korea are apparently easing. US president Trump recently also held a more constructive tone on the trade talks with China. The picture in the Middle East looks more complicated. In a day-to-day perspective, the risk-on context combined with relative calm on the (US) interest rate markets looks a tentatively negative for the dollar. However, in somewhat longer term perspective, we don t see profound change. Short-term developments (both economically and from a monetary point of view) still look modestly USD supportive. EUR/USD returning north of 1.20 would cause some doubts on the USD, but even in that scenario we don t see a trigger for a powerfull EUR/USD comeback in the very near future. On Thursday, sterling lost substantial ground as the BoE left its policy rate unchanged at 0.5%. The BoE admitted that CPI inflation has declined faster than expected, but still sees some excess demand over time. This keeps the door open for a very gradual tightening over the policy horizon. EUR/GBP rebounded north of The markt now sees a chance of about 65% of a rate hike In november. EUR/GBP is a first resistance. Brexit remains a wild card, but unless the process swirls completely out of control, we expect EUR/GBP to hold the 0.89/0.86 trading range. Decent UK eco data might make investors reconsidering the chances for an August rate hike. EUR/USD: downtrend taking a breather EUR/GBP nears resistance as BoE awaits more data evidence P. 3

4 Calendar Monday, 14 May Consensus Previous Japan 01:50 PPI MoM/YoY (Apr) 0.1%/2.0% A -0.1%/2.1% Germany 14MAY-16MAY Wholesale Price Index MoM/YoY (Apr) %/1.2% France 08:30 Bank of France Ind. Sentiment (Apr) Belgium 10MAY-20MAY Budget Balance YTD (Apr) b China 09MAY-18MAY Foreign Direct Investment YoY CNY (Apr) % 10MAY-15MAY Money Supply M2 YoY (Apr) 8.3% A 8.2% Sweden 08:00 PES Unemployment Rate (Apr) % Events 08:30 ECB's Villeroy Speaks in Paris 08:45 Fed's Mester Speaks in Paris 08:45 Fed's Mester Speaks at Bank of France Conference 12:00 ECB s Mersch Speaks in Bodrum 12:15 ECB s Lautenschläger Speaks in Copenhagen 13:45 ECB s Praet Speaks in London 15:40 Fed's Bullard Speaks at Crypto Conference in New York 17:00 ECB s Lautenschläger Speaks in Copenhagen 19:00 US to Sell 10-Year TIPS 19:45 ECB s Coeuré Speaks in Geneva P. 4

5 10-year Close -1d 2-year Close -1d Stocks Close -1d US 2,97 0,01 US 2,53 0,00 DOW 24831,17 91,64 DE 0,56 0,00 DE -0,58 0,00 NASDAQ 7402,883-2,09 BE 0,82-0,01 BE -0,49 0,00 NIKKEI 22865,86 107,38 UK 1,44 0,01 UK 0,79 0,01 DAX 13001,24-21,63 JP 0,05 0,00 JP -0,13 0,00 DJ euro ,52-4,19 IRS EUR USD GBP EUR -1d -2d USD -1d -2d 3y 0,04 2,86 1,17 Eonia -0,3610 0,0000 5y 0,40 2,93 1,35 Euribor-1-0,3710 0,0000 Libor-1 1,9187 0, y 1,01 3,00 1,60 Euribor-3-0,3270-0,0010 Libor-3 2,3425-0,0125 Euribor-6-0,2710 0,0000 Libor-6 2,5150-0,0019 Currencies Close -1d Currencies Close -1d Commodities Close -1d EUR/USD 1,1943 0,0028 EUR/JPY 130,63 0,28 CRB 203,56-0,96 USD/JPY 109,39-0,01 EUR/GBP 0,8818 0,0004 Gold 1320,70-1,60 GBP/USD 1,3542 0,0023 EUR/CHF 1,1948-0,0005 Brent 77,12-0,35 AUD/USD 0,7543 0,0011 EUR/SEK 10,2745-0,0338 USD/CAD 1,2795 0,0028 EUR/NOK 9,5583 0,0222 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) Dublin Research France Austin Hughes London Shawn Britton Singapore Prague Research (CSOB) Jan Cermak Prague 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