Rates: Further underperformance of US Treasuries with key US eco data?

Transcription

1 Monday, 03 April 2017 Rates: Further underperformance of US Treasuries with key US eco data? The US manufacturing ISM will probably key in today s trading session. We put risks on the upside of expectations, which should cause last week s underperformance of US Treasuries vs German Bunds to continue. The focus remains on the US later this week with ADP employment, non-manufacturing ISM, FOMC Minutes and payrolls. Currencies: Dollar shows no clear trend at the start of Q2. Euro softness prevails Last week, the dollar rebounded, but the move was not convincing. EUR/USD remained in the defensive as markets are scaling back FX bets positioning for early ECB normalization. Today, the focus turns to the early month data. The dollar needs strong data to gain sustained ground. Sterling remains well bid even as the Brexit procedure started. 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 equities closed the final session of a strong quarter with minor losses (S&P: +5.5%). Lower bank shares offset gains in utilities and real estate. Asian markets started Q2 on the front foot, overcoming WS s negative lead. US president Trump said he plans to inform Chinese president Xi that the US will act alone against North Korea if it doesn't get more help from Beijing. Trump pushed his view that China engages in trade abuses that lead to deficits. S&P raised Spain s outlook of its BBB+ rating to Positive from Stable on balanced eco performance and narrowing deficit. French left-wing candidate Jean-Luc Melenchon s creeping gain to 16% in the polls is adding a new layer of risk to France s election. He is now within touching distance of Fillon in third place. Crude stockpiles are starting to drop, OPEC Secretary-General Barkindo said, a sign that supply cuts are restoring balance. However, US oil drillers added rigs for an 11th time to 662 last week, more than double the 2016 low, The PBOC raised interest rates for standing lending facility loans, aimed mainly at small- and medium-sized financial institutions. Rates were increased on overnight, 7-day and one-month contracts as it tries to rein in leverage. Confidence among Japan s large manufacturers improved in the first three months of the year as a weaker yen helped profits rise to a record. Today s eco calendar contains ISM manufacturing sentiment, car sales and construction spending. EMU data contain final PMI and unemployment rate. P. 1

2 Rates Monday, 03 April 2017 Dudley brings some animus in end-of-month session US Treasuries outperform German Bunds on Dudley comments Spread widening peripheral and semicore bonds US yield -1d 2 1,27-0,01 5 1,93-0, ,40-0, ,02-0,01 DE yield -1d 2-0,74 0,01 5-0,38-0, ,33-0, ,11 0,00 Strong US ISM and construction spending; as expected car sales EMU unemployment rate to fall further Final EMU PMI s less interesting Global core bonds had every right to react to EMU and US inflation data, but they didn t. EMU inflation increased at a much slower pace, while also core inflation slowed down, partly influenced by the timing of Easter holidays. It nevertheless fend off speculation on an early ECB exit. ECB s Coeuré was the first board member to question the sequence of the normalisation process (tapering vs hiking), but his comments were ignored. US inflation printed in line with expectations with the PCE deflator rising above the Fed s 2% inflation goal for the first time since Q It turned out to be a dull pre-weekend session until NY Fed Dudley hit the wires for a second day running. He said that the Fed could start letting its balance sheet run-off late 2017 and added that normalizing the balance sheet is a substitute for rate hikes. US Treasuries ticked higher and the curve slightly bull steepened (5-30-yr). Month end buying helped US Treasuries too. In a daily perspective, changes on the German yield curve ranged between -1.5 bps (5-yr) and +0.1 bp (30-yr). Changes on the US yield curve varied between -4.3 bps (5-yr) and -2.5 bps (30-yr). On intra-emu bond markets, 10-yr yield spread changes versus Germany range between -+1 bp (Belgium) and +4 bps (Greece and Ireland). The 18 bps Italian spread widening is due to a benchmark change. US eco data on the front stage US eco data, manufacturing ISM sentiment, car sales and construction spending will get the attention today. The March headline ISM is expected to have eased slightly from 57.7 to While the index reached high levels, we are a bit surprised by the expectations for some, albeit modest, easing. The regional sentiments indicators improved further in March, with only the Markit PMI giving easing signals. Also on a global level, sentiment improved further in the internationally oriented manufacturing sector. So, we put the risks on the upside of expectations. Domestic car sales consistently rose between mid-2011 and September 2015 (high at 14.25M). A small easing occurred till mid-2016, but the record high was again approached end The market expects a stabilization in March at 13.65M. Strong consumer confidence points to ongoing strength in car sales, but no further strengthening as the car cycle seems to have reached a top. Construction spending is expected to have recouped January s 1% M/M decline in February. Given the solid single family housing starts in January, we see no reasons to deviate from consensus. The series regularly surprises though. Speeches of ECB Coeuré, Fed Dudley and Harker are probably less important as all three spoke already in past days. US T-Note future (black) and S&P future (orange): T-Note lifted by comments Dudley and month-end buying. EuroStoxx contines its march higher and might re-test 2015 high P. 2

3 Austria, Germany, Spain and France tap market R2 164,40-1d R1 163,12 BUND 161,56 0,12 S1 158,28 S2 157,28 This week s scheduled EMU bond supply comes from Austria, Germany, Spain and France. The Austrian debt agency kicks off tomorrow by tapping the on the run 7-yr RAGB (0% Jul2023) and off the run RAGB (6.25% Jul 2027) for a combines 1.32B. On Wednesday, the German Finanzagentur holds a 5-yr Bobl auction ( 4B 0% Apr2022). On Thursday, The French treasury launches a new 10-yr OAT (1% May2027) and taps the on the run 15-yr OAT (1.5% May2031) for a total amount of 7-8B. The Spanish Tesoro taps the on the run 3-yr Bono (1.4% Jan2020), on the run 10-yr Obligacion (1.5% Apr2027) and off the run Obligacion (4.7% Jul2041). The amount on offer will be announced today. Key US eco data this week Overnight, most Asian stock markets gain around 0.5%. The US Note future and Brent crude trade within narrow ranges, suggesting a neutral opening for the Bund. The focus for today s trading session will be on the US manufacturing ISM. Risks are on the upside of expectations, which is negative for US Treasuries especially as Fed governors recently clearly stated their willingness to normalize monetary policy further in the course of the year. We target a 25 bps rate hike in June. The market implied probability of that scenario is currently 60%. The US eco calendar remains very enticing this week with ADP employment, non-manufacturing ISM, FOMC Minutes and payrolls still to come. Last week s underperformance of US Treasuries vs German Bunds is expected to continue. Technically, we expect the US 10-yr yield to trade in the 2.3%-2.64% range. Moves towards the lower bound could be used to offload bonds or position for higher rates. Longer term, we maintain our scenario of 4 rate hikes in 2017 and higher long term yields. The German 10-yr yield trades in the 0.2%/0.5% range and we hold a similar approach as in the US ahead of the French elections. German Bund: speculation on earlier than expected ECB exit reversed US Note future: Moving back lower as Fed on course to hike rates in June? P. 3

4 Currencies USD shows no clear trend at the start of Q2 EUR/USD holding in the 1.06 big figure as softer EMU inflation continue to weigh Asian equities started the new quarter on a positive footing Dollar still shows no clear trend. US eco data should confirm a sold eco performance Will it be enough to inspire further USD gains? R2 1,1145-1d R1 1,0906 EUR/USD 1,0675-0,0003 S1 1,0341 S2 1,0000 On Friday, EUR/USD entered calmer waters even as the EMU inflation slowed much more than expected. The news was apparently discounted after German and Spanish data on Thursday. EUR/USD hovered in a tight range in the high 1.06 area for most of the day, but closed the session at (from1.0674). USD/JPY failed to sustain Thursday s rebound as the rise in core yields and the equity rally did ran into resistance. The pair closed the session at (from ). Overnight, Asian equities are starting the quarter on a positive footing. The headline Japan Tankan indicator improved for the second quarter in a row, but the rise was more modest than expected. Capex was slightly stronger than expected. The dollar continues to trade mixed. EUR/USD is holding with reach of the correction lows reached late last week. So, the euro remains in the defensive. USD/JPY is holding in the mid 111 area. Today, manufacturing ISM sentiment, car sales and construction spending will get attention. The March manufacturing ISM is expected to have eased slightly from 57.7 to 57.2.Most sentiments indicators improved further in March. Also on a global level, sentiment improved further. So, we put the risks on the upside of expectations. Construction spending is expected to have recouped January s 1% M/M decline in February. Given the solid single family housing starts in January, we see no reasons to deviate from consensus. Speeches of ECB Coeuré, Fed Dudley and Harker are probably less important as all three spoke already in past days. Last week, USD sentiment improved as the US reflation trade regained traction after a very strong US consumer confidence. US Fed speakers also confirmed that further policy normalization is to be expected throughout At the same time, the euro faced headwinds. Market rumours questioned the case for early ECB policy normalization. The move was reinforced by very soft EMU inflation data. In Friday both the decline of the euro and the rebound of the dollar slowed. A good US ISM manufacturing should support a further rebound in US yields and in the dollar. That said, we have the impression that the dollar needs very strong data to gain more ST term. For EUR/USD, has the repositioning away from early ECB normalization s already been worked out. We maintain a cautious EUR/USD negative bias, but the decline might slow compared to last week s pace. We stay more cautious on the USD/JPY upside potential. EUR/USD: euro drifting lower in the 1.09/1.05 range USD/JPY: Rebound above previous range bottom, but no further follow-through gains P. 4

5 From a technical point of view, USD/JPY regained the /60 previous range bottom. This called off the imminent downside alert in this cross rate. For now, we maintain a neutral bias. EUR/USD extensively tested the topside of the MT range, but the test was rejected last week. The / area now looks a solid resistance. EUR/USD might return lower in the previous /1.05 trading range. No negative Brexit fall-out on sterling yet R2 0,8881-1d R1 0,8854 EUR/GBP 0,8510-0,0047 S1 0,8403 S2 0,8304 The final UK Q4 GDP printed at a good 0.7% Q/Q and 1.9% Y/Y on Friday, but details suggested a softening in consumer spending even as the savings ratio declined. Net exports made a substantial positive contribution to growth. Will exports continue to compensate for a slowdown in domestic spending as the Brexit-procedure continues? In a guideline for the Brexit-negotiations, EU Tusk indicated that enough progress has to be made on issues regarding the separation process before talks on future trade relations can start. The news was a bit mixed to even slightly negative for sterling, but for now it didn t hurt the UK currency. Especially EUR/GBP declined further, partially on euro weakness. The pair closed the session at (from ). Cable hovered mostly in the higher half of the 1.24/lower 1.25 big figure but closed the session at The UK manufacturing PMI is expected to rebound slightly from 54.6 to 55.0 today. We have no reason to take a different view from the consensus. Mid- March, sterling found a better bid. Substantially higher than expected UK inflation and a more hawkish tone from the BoE supported sterling. We changed our shortterm bias on EUR/GBP from positive to neutral. Last week s decline of the euro reinforced the EUR/GBP downside momentum. Further consolidation in the MT sideways range might be on the cards. The return below the previous break-up suggests that a full retracement to the range bottom is possible. Longer term, Brexit-complications remain a potential negative for sterling. We are not convinced that the BoE will raise rates anytime soon, even not after recent higher inflation data. EUR/GBP: euro decline and sterling short-squeeze push EUR/GBP lower in the established trading range GBP/USD: sterling holds strong even as USD rebounds P. 5

6 Calendar Monday, 3 April Consensus Previous US 15:45 Markit US Manufacturing PMI (Mar F) Domestic vehicle sales (Mar)Markit 13.65M 13.65M 16:00 ISM Manufacturing (Mar) :00 Construction Spending MoM (Feb) 1.0% -1.0% Japan 01:50 Tankan Large Mfg Outlook (1Q) :50 Tankan Large Non-Mfg Outlook (1Q) :50 Tankan Small Mfg Outlook (1Q) :50 Tankan Small Non-Mfg Outlook (1Q) :30 Nikkei Japan PMI Mfg (Mar F) UK 10:30 Markit UK PMI Manufacturing SA (Mar) EMU 10:00 Markit Eurozone Manufacturing PMI (Mar F) :00 PPI MoM / YoY (Feb) 0.1%/4.2% 0.7%/3.5% 11:00 Unemployment Rate (Feb) 9.5% 9.6% Germany 09:55 Markit/BME Germany Manufacturing PMI (Mar F) France 09:50 Markit France Manufacturing PMI (Mar F) Italy 09:45 Markit/ADACI Italy Manufacturing PMI (Mar) :00 Unemployment Rate (Feb P) 11.9% 11.9% Spain 09:15 Markit Spain Manufacturing PMI (Mar) Belgium 11:00 Unemployment Rate (Feb) % Norway 09:00 Manufacturing PMI (Mar) Sweden 08:30 Swedbank/Silf PMI Manufacturing (Mar) Events 08:30 ECB Coeuré speaks at conference in Paris 16:30 Fed's Dudley Holds Press Briefing on household debt trends in New York 21:00 Fed's Harker Speaks in Philadelphia on Fintech 23:00 Fed's Lacker Speaks in Lexington, Virginia (cancelled) P. 6

7 10-year td -1d 2-year td -1d Stocks td -1d US 2,40-0,02 US 1,27-0,01 DOW 20663,22-65,27 DE 0,33-0,01 DE -0,74 0,01 NASDAQ 5911,738-2,61 BE 0,85 0,00 BE -0,50 0,01 NIKKEI 18983,23 73,97 UK 1,14 0,02 UK 0,13 0,02 DAX 12312,87 56,44 JP 0,08 0,00 JP -0,17 0,02 DJ euro ,93 19,35 IRS EUR USD GBP EUR -1d -2d USD td -1d 3y -0,03 1,82 0,70 Eonia -0,3550 0,0010 5y 0,18 2,07 0,84 Euribor-1-0,3730 0,0000 Libor-1 0,9828 0, y 0,76 2,39 1,19 Euribor-3-0,3290 0,0010 Libor-3 1,1496 0,0028 Euribor-6-0,2410 0,0000 Libor-6 1,4232 0,0033 Currencies td -1d Currencies td -1d Commodities td -1d EUR/USD 1,0675-0,0003 EUR/JPY 118,97-0,44 CRB 185,88 0,36 USD/JPY 111,45-0,38 EUR/GBP 0,8510-0,0047 Gold 1249,30 5,20 GBP/USD 1,2544 0,0065 EUR/CHF 1,0690-0,0001 Brent 53,43 0,79 AUD/USD 0,7602-0,0042 EUR/SEK 9,553 0,0128 USD/CAD 1,3326-0,0014 EUR/NOK 9,16-0,0014 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 ON 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