Currencies: dollar losing marginally ground as Fed rate hike expectations ease further

Transcription

1 Rates: More consolidation ahead? Yesterday, core bonds couldn t really gain on weak US eco data, suggesting that sentiment is still fragile even as chances on a September rate hike fell to below 20%. Today s US data may be mixed with lower than expected inflation and better Michigan consumer sentiment. Such an outcome could be enough for more consolidation. Currencies: dollar losing marginally ground as Fed rate hike expectations ease further EUR/USD and USD/JPY hovered yesterday in well-known territory. USD/JPY lost slightly ground as US interest rates declined. Sterling declined temporary after a soft BoE assessment, but sterling easily recouped those losses. Today the US CPI might support recent trading patterns of the dollar. USD/JPY looks most vulnerable in case of a soft figure. Calendar Headlines S&P Eurostoxx50 Nikkei Oil CRB Gold 2 yr US 10 yr US 2 yr EMU 10 yr EMU EUR/USD USD/JPY EUR/GBP US Equities rebounded yesterday led by the technology sector as Apple rallied on reports of strong iphone 7 sales. The S&P rose 1.0% and the Nasdaq 1.5%. Most Asian shares trade in positive territory too, but China, Hong Kong, South Korea and several other countries are closed for holidays. German Chancellor Merkel and French President Hollande defined a course of action ahead of the Bratislava Summit. The plan focuses on three points: protecting citizens, invest in sectors as the digital economy and renewable energy to drive job growth and job creation and improve the mobility of young people. ECB s Weidmann warned yesterday that targeting ECB purchases towards the most indebted countries would put taxpayer money at risk, adding that he favoured sticking to current rules. Regulators from a few European countries including Germany and Italy told the Basel Committee on Banking Supervision that proposed changes to how banks assess credit, market and operational risks must be scaled back and slowed down, Bloomberg reports quoting people familiar with the matter. The US Justice Department proposed Deutsche Bank to pay $14 billion to settle a set of high-profile mortgage-securities probes stemming from the financial crisis, people familiar with the matter said. Deutsche Bank said in a statement it had no intent to settle these potential civil claims anywhere near the number cited. Today, the eco calendar contains the US CPI inflation and US University of Michigan consumer confidence. EU Leaders meet for Brexit discussions. P. 1

2 Rates Global core bond sentiment remains fragile Global bonds end mixed with lagging long end of the curve US curve steepened, while German curve bear steepened Intra-EMU yield spread changes again minimal. DE yield -1d 2-0,6490-0, ,4910 0, ,0210-0, ,6389 0,0119 US yield -1d 2 0,7378-0, ,1804-0, ,6891-0, ,4589-0,0023 Downside risks US headline CPI Upward risks Michigan consumer sentiment EU leaders hold Brexit Summit Yesterday, global core bonds couldn t profit from a dovish BoE statement and weaker than expected US retail sales and production data. This suggests bond sentiment remains poor and the sell-off phase that started after last Thursday s ECB meeting may not be over yet. In the end though the yield changes were mixed with only the very long end lagging moderately. In a daily perspective, the German yield curve bear steepened with yields 0.2 bps (2-yr) to 3.7 bps (30-yr) higher. US bonds outperformed at the shorter end with a steeper (mixed) curve. Changes on the US yield curve varied from -3.2 bps (2-yr) to +1.3 bp (30-yr). Changes on a September Fed rate hike fell to 18%, the December chances are not about even. On intra-emu bond markets, 10-yr yield spread changes versus Germany are little changed with Greece (+12 bps) and Portugal (+15 bps) underperforming. The latter struggles with the possibility of a downgrade of its rating by DBRS, which would make its bonds ECB ineligible (other agencies rate the debt already junk)and the fiscal plans of the government increase chances of a downgrade. Next review DBRS is on Oct. 21. US CPI & Michigan consumer sentiment in Focus In August, US CPI inflation is expected to have picked up from 0.8% Y/Y to 1.0% Y/Y (0.1% M/M), reversing the previous month s dip. Core inflation, on the contrary, is forecast to have stabilized at 2.2% Y/Y (0.2% M/M). Lower energy prices will be partly offset by higher food prices, but still we see risks for a downward surprise in the headline reading. For the core, we have no reasons to distance ourselves from the consensus and expect the annual rate to stay above 2.0% Y/Y for the 9th consecutive month. The first estimate of September University of Michigan consumer confidence is expected to show a limited increase, from 89.8 to Conference Board s consumer confidence came out surprisingly strong in August and we see upside risks for the Michigan indicator too, before election uncertainty might kick in. T-Note future (orange) and S&P future (black) intraday: Bonds little changed in the end, but unable to capitalize on weak US data. Brent oil: Sideways oriented in broad range between $41.56 and $52.86/barrel. P. 2

3 R2 168,86-1d R1 165,67 BUND 163,68 0,2600 S1 162,56 S2 161,11 Consolidation to continue ahead of FOMC? Overnight, Asian equities are modestly higher following WS strong run yesterday (despite weaker data, but with declining rate hike chances). China is closed. The WSJ says the BOJ is split on easing with some governors losing faith in the positive impact of asset purchases. It confirms longstanding rumours that the BOJ may cut rates and diminish long bond purchases to steepen the curve. The rumour follows sharp two month rise of 30-yr JGB yields and should be fully discounted. JGBs are marginally higher today (<1 bp). The T-Note is little changed. We expect a fairly neutral Bund opening while European equities may open higher (WS). Today the US eco calendar contains inflation (CPI) and Michigan consumer sentiment. We see downside risks for the CPI, but upward risks for the Michigan consumer sentiment. Both are interesting as the Fed wants to see inflation moving higher. Consumer sentiment is interesting after two weak retail sales reports. If sentiment would decline sharply, which is not our forecast as we see upward risks, it would question the strength of the economy. We think the CPI is a bit more important for markets, even if yesterday s weak data likely killed off chances of a rate increase. Summers was the latest to say the Fed has no compelling case for rate hike. So, today s eco data might be mildly positive for core bonds. It could bring more consolidation, at least till the FOMC meeting next Wednesday. Technically, both the Bund and the US Note future extensively tested important support levels, respectively at 163 and at The tests failed, even if the supports are still within reach. Yield resistances for US 10- and 30-yr are 1.75%, 2% and 2.50%, 2.75% respectively. At this stage, we think that the down-move in the Bund and US Note future was corrective in nature as it lacked a real genuine driver and expect the technical support levels to hold up in the run up to the FOMC meeting. With a rate increase likely off the table, it will be the eco and rate projections and the statement that will drive the price action. A renewed lowering of the average and maybe also some of the median dots might give the longer end comfort, but the shorter end may have to cope with hints about a December rate hike. This combination could re-flatten the US curve a bit, following recent steepening. The danger is the BOJ who may start buying less long term bonds to further steepen the curve, which may cause ripples in the US and German long end of the curve. German Bund: Sell-off after ECB meeting, but now signs of some consolidation near the bottom of sideways range. We don t expect the Bund s fate will be sealed before the FOMC/BOJ meeting US Note future: as per Bund, the US Note future suffered even if the Fed will likely stand put in September P. 3

4 Currencies Dollar margianlly lower as rate hike chances decline EUR/USD still going nowhere USD/JPY losing slightly ground as US data dampen Fed rate hike expectations R2 1,1366-1d R1 1,1327 EUR/USD 1, ,0008 S1 1,1123 S2 1,1046 On Thursday, the BoE policy decision and the US eco data (including the retail sales) were the key factors for global (currency) trading. The BoE maintained an easing bias, putting core bond yields and the dollar (temporary) under pressure. The US retail sales disappointed again, but other data were mixed. A USD dip after the retail sales was almost immediately reversed. Later in the session a new modest decline in US bond yields capped any further USD rebound. This was especially visible in USD/JPY. The pair closed the session at ( on Wednesday). EUR/USD finished little changed at (from ). EUR/USD still shows no directional momentum at all. This morning, several Asian markets are again closed. Japanese markets are open. Japanese equities rebound even as the yen trades again stronger. USD/JPY struggles not to fall below the 102 mark. A gradual/modest slide in US bond yields continues to weigh. Japanese banking stocks take the lead in the equity rebound as investors ponder the chances of the BOJ cutting its policy rate further into negative territory. The strong close in the US yesterday evening supports Japanese equities, too. EUR/USD is holding stable in the mid 1.12 area, even as the 2-year interest rate differential between the US and Germany declined a few basis points yesterday. EUR/USD: sideways trading continues USD/JPY: losing slightly ground on declining USD interest rate support US CPI and consumer confidence in focus Soft CPI might be slightly USD negative Today, there are few eco data in Europe but investors will keep an eye at the EU summit, discussing the future of Europe post Brexit. However, the direct impact on markets might be limited. In the US, the CPI and the consumer confidence of the University of Michigan will be published. The US August CPI inflation is expected to have picked up from 0.8% Y/Y to 1.0% Y/Y, reversing the previous month s dip. Core inflation is forecast to have stabilized at 2.2% Y/Y (0.2% M/M). We see downside risks for the headline CPI. For the core, we join the consensus and expect the annual rate to stay above 2.0% Y/Y for the 9th consecutive month. The September Michigan consumer confidence is expected to rise from 89.8 to Conference Board s consumer confidence came out surprisingly strong in August and we see upside risks for the Michigan indicator too. Inflation will probably dominate the USD price action. Of late, the dollar moves had a loose link with the developments in the US bond markets. P. 4

5 Soft US eco data reduced further Fed rate hike expectations for next week s meeting. Today s inflation data might confirm this picture. Of late, USD/JPY proved a bit more sensitive to the swings in US bond yields. For now, EUR/USD hardly reacted. We as assume that these trends to continue today. Of late, mediocre US data made a September Fed rate hike unlikely. EUR/USD rebounded (temporary?) above This made us change our short-term bias from USD positive to neutral. The ECB policy decision didn t change the picture for EUR/USD trading. Range trading in the / remains favoured. Even so, the topside of EUR/USD still looks well protected. Sentiment on USD/JPY also showed some swings of late. Receding chances of a Fed rate hike and uncertainty about the BOJ s commitment to ease policy further initially weighed on USD/JPY. The day-to-day momentum in USD/JPY remains fragile/indecisive. We expect the 99.54/99.02 area to provide strong support is the first point of reference on the topside. More range trading is expected ahead of the Sept 21 BOJ meeting. Post-BoE intraday sterling dip easily reversed R2 0,8725-1d R1 0,8566 EUR/GBP 0,8492 0,0003 S1 0,8344 S2 0,8251 On Thursday, the UK August retail sales and the BoE s policy decision were the main topics for sterling trading. The retail sales remained strong. Still, sterling hardly reacted to the sales data. Traders kept a wait-and-see modus ahead of the BoE policy decision. The BoE left its policy rate and the amount of asset purchases unchanged. The BoE acknowledged that parts of the UK economy held somewhat stronger than expected post-brexit. However, the BoE didn t change the essence of its analysis of the Brexit impact longer term. The majority of the MPC members indicated they will support a further rate cut if the assessment of August was maintained in November. The BoE s policy decision triggered a further decline in Gilt yields. Sterling initially came also under pressure, but the decline petered out later in the session. Sterling even recouped most of the intraday losses. EUR/GBP closed the session at (from 0.85 on Wednesday). Cable finished the day also little changed at Today, there are no important eco data on the agenda in the UK. Recently, sterling corrected lower after a strong run from mid-august. Yesterday, the UK currency tried to extend the downtrend after a soft BoE policy assessment. However, the move could not be maintained. We look out whether the GBP correction is losing momentum. In EUR/GBP, the recent high at is now a first resistance. EUR/GBP: sterling correction slows, at least temporary GBP/USD: topside test rejected. P. 5

6 Calendar Friday, 16 September Consensus Previous US 14:30 CPI MoM YoY (Aug) 0.1% / 1.0% 0.0% / 0.8% 14:30 CPI Ex Food and Energy MoM YoY (Aug) 0.2% / 2.2% 0.1% / 2.2% 14:30 Real Avg Weekly Earnings YoY (Aug) % 16:00 U. of Mich. Sentiment (Sep P) :00 Household Change in Net Worth (2Q) -- $837b 22:00 Total Net TIC Flows (Jul) -- -$202.8b 22:00 Net Long-term TIC Flows (Jul) -- -$3.6b EMU 11:00 Labour Costs YoY (2Q) % France 08:45 Wages QoQ (2Q F) 0.3% 0.3% Italy 10:00 Trade Balance Total (Jul) m Spain 09:00 Labour Costs YoY (2Q) % Events China, Hong Kong, South Korea are Closed for Mid-Autumn Festival Cabinet Office Monthly Economic Report for September EU Leaders Meet Without UK to Discuss Brexit 08:00 Riksbank First Deputy Governor Jochnick Speaks P. 6

7 Contacts 10-year td - 1d 2 -year td - 1d STOCKS - 1d US 1,69-0,02 US 0,74-0,03 DOW ,48 DE 0,02-0,01 DE -0,65 0,00 NASDAQ for Exch - NQI #VALUE! BE 0,26 0,00 BE -0,57-0,01 NIKKEI ,29 UK 0,90 0,02 UK 0,12-0,04 DAX 10431, ,20 JP -0,03 0,00 JP -0,25 0,01 DJ euro ,77 USD td -1d IRS EUR USD (3M) GBP EUR -1d -2d Eonia EUR -0,345-0,003 3y -0,205 1,045 0,474 Euribor-1-0,37 0,00 Libor-1 USD 0,27 0,27 5y -0,105 1,177 0,576 Euribor-3-0,30 0,00 Libor-3 USD 0,38 0,38 10y 0,370 1,502 0,898 Euribor-6-0,20 0,00 Libor-6 USD 0,53 0,53 Currencies - 1d Currencies - 1d Commoditie CRB GOLD BRENT EUR/USD 1,1237-0,0010 EUR/JPY 114,7-0,34 180, ,8 46,38 USD/JPY 102,1-0,20 EUR/GBP 0,8493 0,0003-1d 1,18-7,61 0,20 GBP/USD 1,3229-0,0013 EUR/CHF 1,0927-0,0017 AUD/USD 0,7506 0,0040 EUR/SEK 9,5325-0,02 USD/CAD 1,3159-0,0047 EUR/NOK 9,2536-0,02 Brussels Research (KBC) Global Sales Force Piet Lammens Brussels Peter Wuyts Corporate Desk Joke Mertens Institutional Desk Mathias van der Jeugt France Dublin Research London Austin Hughes Singapore Shawn Britton 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 ON This non-exhaustive non exhaustive information information is based on short-term is based forecasts on for expected short developments term forecasts on the financial for expected markets. KBC Bank developments 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