Rates: US Treasury curve hit by higher CPI, but unlikely to affect rate FOMC decision

Transcription

1 Rates: US Treasury curve hit by higher CPI, but unlikely to affect rate FOMC decision Today, the market calendar is extremely thin and uneventful. Combined with the prospect of Wednesday s FOMC and BOJ decisions, we expect core bonds to trade technically within the well-established ranges. Currencies: dollar rebounds on US CPI. Sterling decline accelerates On Friday, the dollar nicely rebound, especially against the euro as the US CPI was slightly higher than expected. Sterling remains under pressure as the negotiations between the EU and the UK might be tough. Today, the calendar is thin. The dollar might reverse part of Friday s relatively strong gains. 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 On Friday, US equities lost moderate ground on higher-than-expected CPI, but closed well off intraday lows. Asian equities trade strong this morning, supported by speculation that China s fiscal policy will remain loose in H2 as August fiscal expenditure jumped. The HK overnight Hibor jumped sharply this morning, up 15.7%-points to a very high 23.7% amid speculation that China s central bank is intervening to fend off bearish bets on the currency ahead of the FOMC meeting. Oil jumped overnight to $46.52/barrel (Brent) from $45.48/barrel on Friday, as key support loomed amid disruption in Libyan oil supply and signs majors may act to stabilize prices. The Berlin state election turned into another victory for the anti-immigration AfD party entering the state parliament for the first time with 11.5% of the votes (less than polls predicted). SPD and CDU lose their majority, as also the far left and the Green booked nice results. It s a 2nd consecutive defeat for Merkel. Putin United Party won a majority in the Russian Duma elections. S&P upgraded the Hungarian rating to investment grade (BBB-) from junk, after Fitch already did the same previously. This means that many (investment-grade oriented) funds will now be able to buy Hungarian bonds. It is a victory for PM Orban. S&P in other rating action upgraded the Finnish AA+ outlook and the Russian BB+ outlook to stable from negative. They also upgraded the Cypriot rating to BB (positive outlook) from BB-. Moody s upgraded the outlook for the Slovenian Baa3 rating to positive. The market calendar contains only the US house market sentiment report (NAHB) and a speech of ECB Mersch in the evening. P. 1

2 Rates US Treasuries sell off after higher CPI reading US yield -1d 2 0,7702 0, ,2016 0, ,6943 0, ,4452-0,0137 German bonds eke out modest gains Short end US curve sells off on higher CPI, reversing part of earlier steepening Peripheral spreads modestly higher Various rating (outlook) changes DE yield -1d 2-0,6550-0, ,5010-0, ,0070-0, ,6369-0,0020 On Friday, core bonds cruised ahead full speed in the morning session on no specific news. Weaker oil prices and the failure to break key yield resistance levels on Thursday (US 30-yr yield: 2.50%; US 10-yr yield: 1.75%; Bund: 163 support) were marginally supportive. Core bonds came off the intraday highs when slightly higher-than-expected US inflation figures sparked a sell-off at the shorter end of the curve, reversing part of the sharp curve steepening since the start of September. While Fed rate hike probabilities rose only to 20% from18% previously, the higher inflation clearly triggered some curve positioning. The Bund also ended off the intraday highs, but the US CPI had only a modest (negative) impact. In a daily perspective, the German yield curve shifted 0.8 bps (2-yr) to 2.5 bps (10-yr) lower. The US curve ended mixed with the 2yr yield up 3.6 bps, the 10-yr yield nearly flat and the 30-yr yield down 1.7 bps. On intra-emu bond markets, 10-yr yield spread changes versus Germany widened 2-to-4 bps. After market closure, rating agency S&P changed the outlook on the Finnish (AA+) and the Russian BB+ rating to stable from negative and Moody s. They also upgraded the Hungarian rating to BBB- (investment grade) from BB+ (junk) and revised the Cypriot rating up to BB (positive outlook) from BB-. Moody s upgraded the Slovenian outlook (Baa3) from stable to positive. Thin calendar ahead of FOMC & BOJ meetings US NAHB housing market sentiment is expected to have stabilized at 60 in September. The index is hovering sideways since the start of the year, a pattern which we expect to continue, but we see risks for a limited downward surprise. T-Note future (black) and S&P future (orange) intraday: US T-Note erases gains after higher CPI. Equities volatile but limit losses Brent oil: Crucial support at $45.32/barrel. Break would paint double top on charts and open the way to levels below $42/barrel. P. 2

3 R2 165,67-1d R1 164,29 BUND 163,86-0,1800 S1 163 S2 162,56 Only Belgian and German supply this week The Belgian debt agency kicks off this week s scheduled EMU bond supply by tapping 4 OLO s for a combined B: 15-yr off the run OLO 64 (4.5% Mar2026), 10-yr on the run OLO 77 (1% Jun2026), 30-yr off the run OLO 71 (3.75% Jun2045) and 30-yr on the run OLO 78 (1.6% Jun2047). Year-to-date, the Kingdom of Belgium already completed nearly 85% of this year s OLO funding need ( 33.5B). The two very long OLO s on offer cheapened somewhat in ASW spread terms going into the auction as European government bond yield curves steepened following the ECB meeting (no firm commitment to ease policy further). The steepening could already attract some buyers. The 10-yr bonds on offer gave no concession going into the taps. OLO 64 (Mar2026) is expensive while OLO 77 (Jun2026) offers picks up compared to surrounding bonds. The upcoming OLO redemption (OLO % Sep2026) is also supportive. Overall, we expect the auctions to go well. On Wednesday, the German Finanzagentur holds a 5-yr Bobl auction ( 4B 0% Oct2021). Consolidation ahead of FOMC Overnight, Asian equities trade positively with Japan closed for Respect for the Aged Day. The US Note future moves stable while Brent crude has an upward bias. Overall, we expect a neutral opening for the Bund though. Today s eco calendar is empty apart from a second tier US housing market indicator and Belgian supply. We have a neutral view for today and expect some consolidation going into the BoJ and Fed meetings later this week. 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 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 bounced off first technical support (163-aread) US Note future: Consolidation going into FOMC decision P. 3

4 Currencies EUR/USD trades soft, but breaks no important support Dollar rebounds after higher than expected US CPI EUR/USD drops below 1.12 pivot R2 1,1366-1d R1 1,1252 EUR/USD 1,1166-0,0071 S1 1,1123 S2 1,1046 Japanese markets are closed today Dollar trades slightly softer after Friday s rebound PBOC tries to discourage Yuan short speculation US NAHB data won t affect USD trading Room for a small USD setback in a daily perspective? More technical trading expected ahead of the BOJ and Fed policy decisions. On Friday, EUR/USD and USD/JPY didn t go anywhere during the morning session. In the afternoon, the US August CPI was reported higher than expected. US bond yields rose a bit and the dollar rallied nicely especially against the euro. EUR/USD closed the session at (from Thursday). The gains of the dollar against the yen were more modest. USD/JPY finished the day at from on Thursday) This morning, several Asian markets reopen after regional holidays, while Japan is closed. Most markets show moderate gains. Taiwan outperforms (tech sector). A rebound of oil is positive for global risk sentiment and is a slightly negative for the dollar. USD/JPY is drifting off the overnight/ Friday highs in the /45 area and trades currently again in the 102 area. Investors are apparently not convinced that the BOJ will take bold easing steps at Wednesday s meeting. Yuan interest rates in Hong Kong jumped again sharply higher. The move is suspected to be engineered by the PBOC as it tightens liquidity conditions to discourage yuan speculation. The dollar trades also softer against the euro, but the losses are very modest. The dollar maintains most of its post-cpi gains. EUR/USD is changing hands in the area. Today, in the US, NAHB housing market sentiment is expected to have stabilized at 60 September. The index is hovering sideways since the start of the year, a pattern which we expect to continue, but we see risks for a limited downward surprise in September. However, the reaction of the dollar to the NAHB, even in case of a surprise, will be limited. After the Friday s US CPI, the markets now discount a marginally higher chance for a Fed rate hike this week (20%). However, the broader picture hasn t changed. The reaction of the dollar, especially of EUR/USD was quite substantial. In a daily perspective, there is maybe room for a slight counter move. EUR/USD is also coming closer to support. It won t be easy to break it ahead of the FOMC meeting. USD/JPY trading will probably remain technical in nature. Markets are still reluctant to hold big yen shorts going into the BOJ policy decision Wednesday morning. EUR/USD: declines post-cpi, but support holds USD/JPY: reaction to US CPI more muted than in EUR/USD P. 4

5 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. 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. Declining chances on a Fed rate hike are a negative for the dollar, but uncertainty about the BOJ s commitment to ease policy still weighs on USD/JPY. The day-to-day momentum in USD/JPY remains fragile. We expect the 99.54/99.02 area to provide strong support is the first main resistance. More range trading is expected ahead of the Sept 21 BOJ meeting. Sterling correction accelerates R2 0,8725-1d R1 0,8582 EUR/GBP 0,8558 0,0066 S1 0,8344 S2 0,8251 On Friday, EUR/GBP and cable showed substantial intra-day swings despite the absence of UK data. Sterling was resilient on Thursday despite a soft BoE policy assessment, but sterling resilience dwindled on Friday, without an obvious reason. The overall European risk-off might have played a role as risk-off sentiment is often a negative for sterling. Regarding Brexit, late on Friday there UK s Hammond said he was ready to ditch the EU single market. Whatever the reason, sterling wasn t in really good shape today. EUR/GBP rebounded north of during the morning session. The move continued/accelerated after the US CPI as cable underperformed EUR/USD. The Hammond comments finally deepened the sterling losses across the board. EUR/GBP closed the session at (from ). Cable was also hit hard. The pair closed the session just north of 1.30 (1.302, from on Thursday). Overnight, the UK Rightmove house prices were reported at 0.7% M/M and 4.0% Y/Y. Sterling is regaining slightly ground in Asia. However, it looks a technical rebound after Friday s steep losses rather than a reaction to the data. Today, there are no important eco data in the UK. Over the previous two weeks, sterling corrected lower after a strong run from mid-august. On Thursday, sterling traded resilient after a soft BoE policy assessment. This could have but a signal that the GBP-correction was losing momentum. However, this working hypothesis was rejected on Friday. There are growing signs that political negotiations on Brexit might become tough which continues to weigh on sterling. So for now, the short-term momentum remains sterling negative. EUR/GBP remains the key reference on the charts; EUR/GBP: sterling correction continues GBP/USD: sharp sell-off, challenging the 1.30 level. P. 5

6 Calendar P. 6

7 Contacts 10-year td - 1d 2 -year td - 1d STOCKS - 1d US 1,69 0,00 US 0,77 0,03 DOW ,80 DE 0,01-0,01 DE -0,66-0,01 NASDAQ for Exch - NQI #VALUE! BE 0,25-0,01 BE -0,57 0,00 NIKKEI ,29 UK 0,88-0,02 UK 0,12 0,01 DAX 10276, ,17 JP -0,04 0,00 JP -0,25 0,00 DJ euro ,25 USD td -1d IRS EUR USD (3M) GBP EUR -1d -2d Eonia EUR -0,346-0,001 3y -0,215 1,069 0,462 Euribor-1-0,37 0,00 Libor-1 USD 0,27 0,27 5y -0,115 1,200 0,558 Euribor-3-0,30 0,00 Libor-3 USD 0,38 0,38 10y 0,365 1,511 0,875 Euribor-6-0,20 0,00 Libor-6 USD 0,53 0,53 Currencies - 1d Currencies - 1d Commoditie CRB GOLD BRENT EUR/USD 1,1166-0,0071 EUR/JPY 113,98-0,72 180, ,98 46,56 USD/JPY 102,09-0,01 EUR/GBP 0,8558 0,0065-1d 0,11 2,18 0,18 GBP/USD 1,3043-0,0186 EUR/CHF 1,0933 0,0006 AUD/USD 0,7539 0,0033 EUR/SEK 9,5506 0,02 USD/CAD 1,3148-0,0011 EUR/NOK 9,2535 0,00 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