Rates: Core bonds rally on weak US durables, tumbling oil & soft FOMC

Transcription

1 Rates: Core bonds rally on weak US durables, tumbling oil & soft FOMC Thursday, 28 July 2016 The US and German curves bull flattened on a variety of impetus. The FOMC keeps its options open, but doesn t give a hint about the timing of its next move. We suspect that oil, equities and maybe some Fed talk will set the direction going forward, unless eco data would surprise. Currencies: Dollar declines as Fed stays muted on next rate hike After an uneventful session, the dollar declined after the Fed policy statement as the Fed gave no hint on the timing of a next rate hike. Today, the data probably won t have a lasting impact on USD trading. USD trading will be driven by the post Fed repositioning and uncertainty going in to the BOJ s policy decision. We don t expect further sustained EUR/USD gains. Calendar Headlines 2 yr US 10 yr US 2 yr EMU 10 yr EMU EUR/USD S&P Eurostoxx50 Nikkei Oil CRB Gold USD/JPY EUR/GBP US equities (S&P) ended the session little changed, as a dovish Fed wasn t enough to trigger a rally to new highs. The NASDAQ did well on the Apple guidance on Tuesday night. Asian equities trade down as the dollar weakened post Fed. The FOMC kept rates unchanged and gave no hint whatsoever on the timing of the next move. It upgraded its economic assessment in line with hard data, sees diminished near term risks, but keeps monitoring closely the global economic and financial environment. Investors are still waiting on the details of Japanese PM Abe s fiscal stimulus package nominally worth 28 trillion yen to gauge the real spending and its effect on the economy. Turkey is widening its crackdown on dissent after failed coup. Newspapers and TV stations are closed and a head of a research firm lost his licence. BNP s and Credit Suisse s results beat market estimates, with especially Credit Suisse showing unexpected good results. Today, the euro eco calendar is interesting with the EC economic confidence and the German inflation. In the US the initial claims and the trade balance are scheduled for publication. Italy and the US tap the markets. The earnings calendar shifts into higher gear. P. 1

2 Rates Thursday, 28 July 2016 Markets react on FOMC in dovish fashion US yield 1d 2 0,7302 0, ,0976 0, ,5078 0, ,2193 0,0686 DE yield 1d 2 0,6240 0, ,5100 0, ,0830 0, ,3863 0,0836 Core bonds rally on weak US durables, tumbling oil prices and a dovish Fed US and German yield curves bull flatten Minor to modest spread widening peripherals Yesterday, German bonds started the session in a positive mood, ignoring a similar upbeat start of European equities. Second tier eco data were ignored. M3 money supply was in line of expectations, but lending to corporates and households was rather weak. During the afternoon session, the US durable orders were ugly, suggesting that investments are still on hold ahead of the US elections. US Treasuries were lifted into positive territory and gradually climbed higher, before and after the FOMC statement (see below). The US Note future closed at the highs with solid gains. The price pattern of the Bund was similar with a 90 tick gain in US after trading. US equities erased small losses after the FOMC decision, but couldn t avoid minor closing losses, while the dollar weakened. Oil tumbled earlier in the session as inventories rose and helped sustain the core bond rally. In a daily perspective the US and German curves bull flattened with US yield changes between 3.6 bps (2 yr) and 7.2 bps (30 yr). German yields fell between 1.2 (2 yr) and 6.5 bps (30 yr). Peripheral spreads widened marginally with Spain underperforming (+4 bps). FOMC gives no clues on timing policy change The FOMC left its rates unchanged and gave no hint whatsoever about the timing of a possible rate increase. In the statement, the FOMC upgraded the economic picture. They recognized that the labour market strengthened and economic activity has been expanding at a moderate rate. On balance, payrolls and other labour market indicators point to some increase in labour utilization in recent months. Household spending has been growing strongly. The Fed left out references to exports and housing, but repeated the softness in business fixed investment. There were no noticeable changes in the description of inflation and inflation expectations. So, the first paragraph on the state of the economic activity was substantially changed in line with the story of the hard data. The FOMC added one sentence in the second paragraph: Near term risks to the economic outlook have diminished. This suggests that conditions for tightening have improved and keeps the door open for a rate hike probably in December, or, less likely, in September. The Fed continues to closely monitor inflation indicators and global economic and financial developments. The near term risks reference was probably triggered by markets post Brexit recovery and data strength. The closely monitors reference suggests that the FOMC wants more information. The Fed isn t yet entirely convinced that inflation is moving to target and that global risks have diminished enough to be satisfied. Worth mentioning, but in line with expectations, Kansas Fed George voted again for an immediate rate hike, after voting with the majority at the previous meeting. T Note future (orange) & S&P future (black)(intraday): weak durables, tumbling oil and dovish Fed send core bonds higher Fed Fund strip curve (change on Fed): Curve shifts lower as some more rate increase is priced out P. 2

3 R d R1 168,86 BUND 167,47 0,8300 S1 165,61 S2 163,61 New Italian 10-yr BTP trades cheap on grey market The Italian debt agency taps the on the run 5 yr BTP ( 1.5 2B 0.45% Jun2021) and launches a new 10 yr BTP ( 4 4.5B 1.25% Dec2026). Grey market trading suggests that the new BTP will be priced with a 17.8 bps pick up in ASW spread terms. That corresponds with a 25 bps pick up in yield terms. These impressive pick ups should be supportive for the auction despite negative headlines on the Italian banking sector and summer trading conditions. The Jun2021 BTP trades stable in ASW spread terms going into the auction and is normal on the curve. Additionally, the Italian treasury sells a floating rate 7 yr CCTeu. The Treasury ends the refinancing with a $28B 7 yr Note auction. Currently, the WI trades around 1.35%. Today: Downside blocked Overnight, most Asian stock markets lose ground with Japan underperforming ( 1%) on the back of a stronger yen. Brent crude trades stable near yesterday s lows ($43.5/barrel area) while the US Note future lost marginally ground. We expect the Bund to open near US after trade levels. Today s eco calendar contains EC confidence data, German CPI and US weekly jobless claims. We think that the echo of yesterday s FOMC meeting will dominate trading though. Until a new batch of US eco releases (ISM/payrolls next week) confirms underlying eco strength or Fed governors point to September for the next rate hike, the downside of US Treasuries is probably blocked. Especially against the background of declining oil prices and fatigue on the bullish equity rally. It should allow core bonds to move back higher in the current trading ranges. For the US Note future, it currently tests the resistance, which if broken would point to more upside. The broader range of the T Note is bounded by and The range for the Bund is German Bund: failed test of first support at US Note future: Fed gives no clue whatsoever about near term rate hike. Downside blocked awaiting eco data/fed speak. P. 3

4 Currencies Fed provides no support for the dollar Dollar declined as Fed gave no hint on the timing of a rate hike R2 1,1428 1d R1 1,1189 EUR/USD 1, ,0075 S1 1,0913 S2 1,0822 Dollar stays in the defensive post Fed in Asia Uncertainty ahead of the BOJ decision weighs on USD/JPY Eco calendar is only modestly interesting Post Fed repositioning and anticipation on the BOJ meeting will set to tone for USD trading today. On Wednesday, the major dollar cross rates initially showed no directional trend as investors counted down to the Fed policy statement. EUR/USD was paralysed near USD/JPY hovered up and down in the 105 big figure. The Fed acknowledged the recent improvement in data and said that near term risks to the economic outlook have diminished. However, with no hint on the timing of a rate hike, the market considered the statement soft. US bond yields declined a few basis points and the dollar declined. EUR/USD closed the session at (from ). USD/JPY also declined a bit further off the intraday highs reached in Asia and finished the session at (from ). This morning, Asian equities trade with modest to moderate losses. The rise of the yen weighs on regional sentiment. USD/JPY extends the post Fed slide and trades currently in the area. According to press headlines, the JPY 28 trillion fiscal package includes 7 trillion actual spending, but details aren t available yet. Markets are also still waiting for the amount of BOJ accommodation to finance the fiscal package. So, nervousness in the run up to tomorrow s BOJ decision persists, keeping the yen well bid. The post Fed decline of the dollar is also slightly supportive for commodities and commodity related currencies. AUD/USD trades again in the area. Contrary to what was of the case of late, EUR/USD this time also follows the global market/usd move. EUR/USD trades stronger in the area. Today, the eco calendar contains the confidence indicators of European commission and the German inflation data. EMU Economic confidence is expected to decline from to German harmonised CPI is expected to rise 0.3 M/M and 0.3% Y/Y. We don t have reasons to distance us from the consensus. The US jobless claims are expected to have rebounded from to a still low The June US trade deficit is expected little changed at $ 61 bln. At the margin, the data might be slightly USD negative. However, we don t expect a sustained reaction. USD trading will be driven by investor repositioning after the Fed policy decision and the outlook/uncertainty ahead of tomorrow s BOJ meeting. Regarding the post Fed market move, the reaction of EUR/USD looks a bit overdone. It might have been due to the absence of a hint on the timing of the next move. However, the market was probably also long USD, triggering a modest repositioning out of the dollar. We don t see reason for this rebound to continue. USD/JPY remains a wildcard going into tomorrow s BOJ meeting. Uncertainty on the degree of BOJ policy accommodation might continue to weight on USD/JPY today. EUR/USD rebounds as Fed stays muted on rate hike? USD/JPY: trading volatile as stimulus uncertainty persists P. 4

5 Of late, the global risk on and decent US eco data (payrolls, retail sales) had only a limited impact on EUR/USD. The pair traded with a slightly negative bias, but held within the / post Brexit range. For now, there is no trigger to break this pattern. In case of ongoing good US data, the Fed might come again in the picture. Admittedly, yesterday s Fed statement suggests that really strong data are needed for the Fed to hint on a next rate hike. After Brexit, we assumed that EUR/USD entered a sell on upticks market. We hold on to that view. The post Brexit intraday top (1.1189) is a first resistance. First support comes in at (June 24 low). USD/JPY was well bid recently on the hope for more fiscal stimulus and ongoing easy monetary conditions in Japan. The pair broke the resistance on speculation of Helicopter Money but the move was aborted as BOJ Kuroda dismissed the idea. The debate is ongoing. The prospect of more stimulus is yen negative. However, the correction top is a strong resistance that may hold unless the BOJ eases really aggressive. R2 0,8627 1d R1 0,847 EUR/GBP 0,84 0,0029 S1 0,8251 S2 0,8206 Sterling holds within established ranges Two days ago sterling easily reversed early losses after BoE s Weale (usually a hawk) supported calls for additional easing. Yesterday, the intraday price pattern was slightly different. The UK currency was in the defensive during the morning session, even as the UK Q2 GDP was strong at 0.6% Q/Q and 2.1% Y/Y. Of course, the report applied to the pre Brexit era. Even so, it was a bit strange to see sterling declining further after the publication. EUR/GBP touched an intra day top in the area around noon. Cable dropped below The July CBI reported sales were very weak, but had no additional negative impact on sterling. In technical trading, sterling even reversed part of the earlier losses. EUR/GBP closed the session at (from ). Cable rallied on post Fed USD weakness and closed the day at (from1.3130). This morning, July Nationwide house prices were fairly strong at 0.5% M/M and 5.2% Y/Y, but it doesn t help sterling. The UK currency is in the defensive, both against the euro and the dollar. A YouGov poll suggests a sharp decline in consumer confidence post Brexit. The decline of oil and a less positive risk sentiment might weigh on sterling too. There are no other UK eco data. So, global factors will drive sterling. An erosion of the global risk on rally might be a negative for sterling, even as we are well aware that the it held up well off late. Longer term picture. Over the previous two weeks, sterling initially remained strong as the BoE left its policy unchanged, even as the BoE indicated that stimulus was likely at the August meeting. This prospect should cap further sterling gains. We consider the post BoE highs of sterling against the euro (EUR/GBP ) and against the dollar (Cable area) as strong resistances. We prefer to sell sterling on upticks. EUR/GBP: holding at tight range, awaiting a clear signal from the BoE GBP/USD ST consolidation persists P. 5

6 Calendar Thursday, 28 July Consensus Previous US 14:30 Advance Goods Trade Balance (Jun) $61.0b $60.6b 14:30 Initial Jobless Claims 262k 253k 14:30 Continuing Claims 2136k 2128k 15:45 Bloomberg Consumer Comfort 42.9 UK 08:00 Nationwide House PX MoM YoY (Jul) 0.0% / 4.5% 0.2% / 5.1% EMU 11:00 Economic Confidence (Jul) :00 Business Climate Indicator (Jul) :00 Industrial Confidence (Jul) :00 Services Confidence (Jul) :00 Consumer Confidence (Jul F) Germany 09:55 Unemployment Change (000's) (Jul) 4k 6k 09:55 Unemployment Claims Rate (Jul) 6.1% 6.1% CPI Baden Wuerttemberg MoM YoY (Jul) 0.0% / 0.2% 09:00 CPI Saxony MoM YoY (Jul) 0.1% / 0.4% 10:00 CPI Brandenburg MoM YoY (Jul) 0.1% / 0.1% 10:00 CPI Hesse MoM YoY (Jul) 0.1% / 0.0% 10:00 CPI Bavaria MoM YoY (Jul) 0.1% / 0.6% 10:30 CPI North Rhine Westphalia MoM YoY (Jul) 0.1% / 0.4% 14:00 CPI MoM YoY (Jul P) 0.3% / 0.3% 0.1% / 0.3% 14:00 CPI EU Harmonized MoM YoY (Jul P) 0.3% / 0.3% 0.1% / 0.2% Italy 10:00 Hourly Wages MoM YoY (Jun) 0.0% / 0.6% Belgium CPI MoM YoY (Jul) 0.1% / 2.2% Spain 09:00 Total Mortgage Lending YoY (May) 28.6% 09:00 House Mortgage Approvals YoY (May) 24.6% 09:00 Unemployment Rate (2Q) 20.30% 21.00% Sweden 09:30 Unemployment Rate SA (Jun) 7.0% 7.2% 09:30 Retail Sales MoM YoY (Jun) 0.2%/4.1% 1.7% / 4.6% Events Credit Suisse (06:30), BNP Paribas (07:00), Danone (07:30), Renault (07:30), TOTAL (08:00), Shell (08:00), Carrefour, Volkswagen, Dow Chemical (12:45), Ford Motor Co (13:00), Alphabet (aft mkt) Announce Q2 Earnings Italy Bond Auction US 7Yr Notes Auction ($28B) P. 6

7 Contacts Thursday, 28 July year td 1d 2 year td 1d STOCKS 1d US 1,51 0,06 US 0,73 0,02 DOW ,17 DE 0,08 0,05 DE 0,62 0,02 NASDAQ or Exch NQI #VALUE! BE 0,14 0,08 BE 0,57 0,02 NIKKEI ,84 UK 0,73 0,09 UK 0,11 0,04 DAX 10319, ,55 JP 0,27 0,01 JP 0,37 0,01 DJ euro ,48 USD td 1d IRS EUR USD (3M) GBP EUR 1d 2d Eonia EUR 0,331 0,003 3y 0,215 0,999 0,481 Euribor 1 0,37 0,00 Libor 1 USD 0,45 0,45 5y 0,145 1,116 0,540 Euribor 3 0,30 0,00 Libor 3 USD 0,51 0,51 10y 0,285 1,399 0,829 Euribor 6 0,19 0,00 Libor 6 USD 0,59 0,59 Currencies 1d Currencies 1d Commoditie CRB GOLD BRENT EUR/USD 1, ,0075 EUR/JPY 115,99 0,06 179, ,16 43,61 USD/JPY 104,8 0,75 EUR/GBP 0,84 0,0029 1d 1,69 21,56 1,16 GBP/USD 1,3176 0,0046 EUR/CHF 1,0915 0,0012 AUD/USD 0,7524 0,0044 EUR/SEK 9,541 0,03 USD/CAD 1,3138 0,0043 EUR/NOK 9,4431 0,03 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 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