Rates: Yellen confirms the Fed won t change policy in June and likely neither in July

Transcription

1 Rates: Yellen confirms the Fed won t change policy in June and likely neither in July Today s calendar is uninspiring, but the German 10 year yield is irresistibly close to the all time lows, while the US 10 year yield approaches again the 1.70% support area. We are no fan of Bunds at such lofty levels. In the US, markets will still be occupied by guessing the timing of the next rate hike. After Yellen, also the July meeting has become less likely. Currencies: dollar stabilizes as Yellen stays muted on timing of next rate hike The dollar stabilizes after the post payrolls sell off. Yellen indicated further gradual normalization, but it was not enough to give the dollar a real boost. Today, technical trading might be on the cards. We look out whether EUR/USD tops out after the recent rebound. Sterling is also better bid as new polls suggest a narrow lead for the Remain camp. 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 ended with moderate gains yesterday, supported by the Yellen comments. The S&P jumped to its highest level for this year. This morning, Asian shares show broad based gains. Fed Chairwoman Yellen signalled yesterday the Fed won t raise rates next week, pointing to sizable uncertainties, which should be resolved first. Yellen however added that she expects the economic expansion to continue, reaffirming that the federal funds rate will need to rise gradually over time. Hillary Clinton secured the delegates needed to clinch the Democratic nomination, according to the Associated Press, just one day ahead of the primaries in California and five other states. The Reserve Bank of Australia left interest rates unchanged at its record low level of 1.75% as it judged policy is consistent with sustainable growth in the economy and inflation returning to target over time. The Aussie dollar strengthened further this morning. Two polls showed this morning that Britons narrowly favour remaining in the EU. According to the YouGov survey, the remain camp rose by 2 points to 43%, overtaking the Leave side which dropped to 42%. The ORB telephone survey showed the lead of the Remain camp slowing to just one point. Today, the eco calendar remains thin with only the final reading of euro zone first quarter GDP. ECB s Makuch and Knot are scheduled to speak. P. 1

2 Rates Tuesday, 07 June 2016 Calm trading session ahead of Yellen speech US yield 1d 2 0,7992 0, ,25 0, ,735 0, ,5562 0,0376 DE yield 1d 2 0,5310 0, ,4070 0, ,0820 0, ,7614 0,0172 Yellen optimistic on outlook Uncertainties remain though Policy only modestly accommodative So, Fed in no hurry to hike rates. Yesterday, global core bonds corrected marginally lower in a thinly traded session. US Treasuries underperformed following the lofty gains on Friday s horrible labour market report. European stock markets eked out marginal gains, but US equities fared better. Comments from Boston Fed Rosengren and Atlanta Fed Lockhart didn t trigger price action. In a daily perspective, changes on the German yield curve ranged from 0.8 (2 yr) to 1.5 bps (30 yr). The US yield curve bear steepened with yields 2.4 bps (2 yr) to 4.8 bps (30 yr) higher. The curve movement was triggered by Yellen s comments (see below). Fed chairwoman Yellen was optimistic about the US economy. She hailed the progress made since the 2007 recession on the level of employment and seemed pretty confident that inflation will go to the target helped by the stabilization of the dollar and the rise of oil prices. She called Friday s payrolls report disappointing, but pointed to some positive aspects and said not to attach too much importance on a single month s report. That said, the monthly labour market report is an important economic indicator, and so we will need to watch labour market developments carefully. She summarized the US economic outlook as : I continue to expect further progress towards our employment and inflation objectives. However, there are several uncertainties. First, she thinks that the weak investment performance in recent months is concerning, and Friday's employment report provides another reminder that the question is still relevant. Second, there are risks stemming from abroad: It is widely acknowledged that China faces considerable challenges as it continues to rebalance its economy toward domestic demand and consumption. She also referred to Brexit and its consequences. Yellen s third and fourth worries were the low productivity and low inflation expectations. US10 yr yield: Again near key support area around 1.7%. US 2 to 30 yr yield spread widens after Yellen sounded somewhat dovish and de facto postponed a rate hike Yellen said the current policy stance was appropriate and mildly supportive for the economy, as the real natural FF rate might be close to zero while the real FF rate is about 1%. She continues to believe that it will be appropriate to gradually reduce the degree of monetary accommodation. Unfortunately, as I noted earlier, new questions about the economic outlook have been raised by the recent labor market data. Is the markedly reduced pace of hiring in April and May a harbinger of a persistent slowdown in the broader economy? Or will monthly payroll gains move up toward the solid pace they maintained earlier this year and in 2015? Does the latest reading on the unemployment rate indicate that we are essentially back to full employment, or does relatively subdued wage growth signal that more slack remains? Monetary policy is not on a pre set course and the Committee will respond to new data and reassess risks so as to best achieve our goals. Contrary to last week, she didn t mention that policy P. 2

3 will be tightened in the next months. We think that the Fed will take its time and leave policy unchanged not only at the June, but now probably also at the July meeting. R2 166,63 1d R1 165,23 BUND 163,92 1,1000 S1 163,06 S2 161,46 The Netherlands, Austria and US supply market The Dutch debt agency launches a new 5 yr DSL ( 4 6B 0% Jan2022) via Dutch direct auction. Grey market trading suggest that the bond will be priced with a 4.9 bps pick up in ASW spread terms compared to the previous 5 yr benchmark (0.25% Jan2020). It corresponds with a 21 bps pick up in yield terms. If these data prove to be accurate, we expect good demand at the auction given the cheap pricing on the Dutch curve and compared to other core EMU debt. The Austrian debt agency taps the off the run 10 yr RAGB (1.75% Oct2023) and on the run 10 yr RAGB (0.75% Oct2026) for a combined 1.1B. Both bonds traded stable going into the auction and the Oct2026 RAGB is cheap on the Austrian curve. Overall, we expect a plain vanilla auction. In the US, the treasury starts its mid month refinancing operation with a $24B 3 yr Note auction. Technical, sentiment-driven trading Overnight, Asian equity markets eke out gains of around 0.5% with China underperforming (minor losses). The US Note future has a small downward bias as Yellen ruled out a June rate hike, but definitively kept options open for a hike at a later meeting. Brent crude hovers below the recent high of $51/barrel. Overall, we expect a neutral opening for the Bund. Today s eco calendar is uninspiring with only the second reading of Q1 EMU GDP. We expect technical and sentiment driven trading. ECB Makuch and Knot are scheduled to speak and we expect them to echo comments by ECB Nowotny and Smets yesterday. Both ECB governors hinted that the EMU economy and inflation made a turn for the better. Therefore, they don t expect additional action by the central bank. At this stage, markets pay more attention to the Fed or Brexit instead of changing ECB rhetoric. Nevertheless, as their voices sound louder, it could/should lay a firmer bottom below European rate markets. Technically, the German 10 yr yield is back in the single digits (0.08%) and closes in on the all time low (0.05%). A test seems irresistible, but we re no fan of Bunds at such lofty levels. The US Note future surged towards the upper bound of the sideways range ( to ) following the payrolls miss. A June rate hike is now off the table, but we think it s only delayed. We re in no hurry, but we think this uptick could be used to eventually sell US Treasuries if US eco data print again stronger or Fed officials signal enhanced chances of such a move. German Bund (Sept. contract!!): New high. German 10 yr yield close to record low US Note future (September contract!!): June rate hike bets dashed after horrible June payrolls & Yellen speech P. 3

4 Currencies Dollar stabilzes as Yellen confirms slow rate hike path Dollar stabilizes Yellen speech fails to give a clear direction for USD trading R2 1,1616 1d R1 1,1447 EUR/USD 1, ,0015 S1 1,1243 S2 1,1058 On Monday, the dollar held tight ranges against the euro and the yen close to the post payrolls lows as investors awaited a speech from Fed chairwoman Yellen. She indicated to remain confident that positive forces will support employment growth and inflation. So further gradual increases in the Fed fund rate are likely. Yellen mentioned several risks including Brexit. Contrary to last week ( in coming months ), the Fed chair didn t give any hints on the timing of a next rate hike. The dollar spiked temporary up and down during Yellen s speech, but finally returned to the intraday trading range. EUR/USD closed the session at , little changed from the close on Friday. USD/JPY regained some ground as equities performed rather well. The pair closed the session at , up from on Friday. Overnight, Asian equities trade in positive territory. The prospect that US interest rates will be raised only very gradually supports equities and keeps commodities well bid. Japanese equities reversed the post payrolls losses. USD/JPY also rebounds. The pair trades in the area. Other Asian markets also show gains of about 0.5% 1%, with China underperforming. The RBA as expected left tis policy rate unchanged at 1.75%. The RBA said the decision is consistent with sustainable growth and CPI returning to target even as inflation will remain quite low short term. Of late, the Aussie dollar was already supported by the positive sentiment on global commodity markets. AUD/USD extends gains after the RBA decision and jumped north of AUD/USD EUR/USD continues yesterday s trading pattern and holds a sideways trading pattern in the mid 1.13 area. EUR/USD: rebound to run into resistance? USD/JPY: post payrolls decline slows as equities stay well bid Today, the eco calendar is again thin Global equity sentiment and technical considerations will dominate trading EUR/USD looking for a top? The eco calendar is again thin today. In Europe, the final EMU Q1 GDP will be published. EMU growth is expected to be confirmed at 0.5% Q/Q and 1.5% Y/Y. Investors will keep an eye at the composition of the growth, but we don t expect the report to have a lasting impact on EUR/USD trading. In the US only the final Q1 until labour cost and productivity data will be published. Yellen mentioned productivity growth as a risk in her speech yesterday. However, we don t expect today s finial productivity data to move currency markets. So, USD trading will be technical in nature. We look out whether there is some post Yellen repositioning. For now, markets don t look inclined to prepare for Fed action anytime soon. At the same time, the constructive equity sentiment should help to protect the downside of the dollar. We stay cautious on USD/JPY in a longer term perspective. Short term, the / support looks quite solid. The dollar still trades a bit weak against the euro. However, with the Fed still on P. 4

5 track to raise rates over time and the euro potentially feeling headwinds from all kinds of event risk (including Brexit), we look out for a short term topping out process in EUR/USD. Technically, the dollar rebounded in May on more hawkish Fed comments/minutes that opened the door for a possible June rate hike. Our basic scenario was (and still is) that the US economy is strong enough to allow the Fed to implement two rate hikes this year. However Friday s payrolls triggered a repositioning in the dollar. The break/test of the EUR/USD / area is rejected. We assume some consolidation in EUR/USD as markets will look for other key US eco data to assess the timing of the next Fed rate hike. Brexit might also become a wildcard for EUR/USD trading. A global USD rally blocked the downside of USD/JPY early May. The pair started a steady rebound. The high 111 area was a strong resistance, but a real test didn t occur. The pair was already off the recent highs before the payrolls and the decline accelerated after the release. With the Fed rate hike probability declining and global sentiment potentially weakening, we expect any rebound of USD/JPY to be short lived. R2 0,8117 1d R1 0,7947 EUR/GBP 0,782 0,0068 S1 0,772 S2 0,7526 Sterling sell-off slows, for now On Monday morning EUR/GBP extended its rally. On Friday, the move was inspired by the post Payrolls rally of EUR/USD. Yesterday morning, the move was due to outright sterling weakness as two opinion polls indicated a lead of the leave camp over the remain camp for the June 23 UK referendum. EUR/GBP touched offers just north of 0.79 in Asia. Cable dropped temporary below the 1.44 area. During the European session, there were no additional sterling losses even as the Brexit topic was in the spotlights on the financial newswires. The rebound of UK/commodity stocks maybe helped to avoid further sterling losses. EUR/GBP closed the session at (from on Friday). Cable finished the day at (from on Friday). This morning, sterling trades very volatile. BRC like for like sales were stronger than expected at 0.5 Y/Y (from 0.9% Y/Y).Contrary to polls in the weekend indicating a lead for the Brexit camp, two new polls this morning show a narrow lead for remain. However, other factors were probably also in play given the very wild swings (fat finger?). In the end, sterling trades again slightly stronger to yesterday s close. Later today, the Halifax house prices will be published, but we assume that Brexit will remain the key driver for sterling trading. Yesterday s tensions apparently eased this morning. Even so, we expect sterling to remain in the defensive as the campaign on the EU referendum intensifies. The break above is a first indication of further deteriorating sterling sentiment. We maintain a sterling negative bias EUR/GBP: sterling decline slows, for now GBP/USD: no clear trend as USD weakness and sterling weakness counterbalance each other P. 5

6 Calendar Tuesday, 7 June Consensus Previous US 14:30 Nonfarm Productivity (1Q F) 0.6% 1.0% 14:30 Unit Labor Costs (1Q F) 4.0% 4.1% 16:00 IBD/TIPP Economic Optimism (Jun) :00 Consumer Credit (Apr) $18.000b $29.674b Japan 01:50 Official Reserve Assets (May) A $1254.0b $1262.5b 07:00 Leading Index CI (Apr P) A :00 Coincident Index (Apr P) A China Foreign Reserves (May) $3200.0b $3219.7b Australia 06:30 RBA Cash Rate Target A 1.75% 1.75% UK 01:01 BRC Sales Like For Like YoY (May) A 0.5% 0.9% 09:30 Halifax House Prices MoM YoY (May) 0.3%/8.9% 0.8% / 9.2% EMU 11:00 GDP SA QoQ YoY (1Q F) 0.5% / 1.5% 0.5% / 1.5% Germany 08:00 Industrial Production MoM YoY (Apr) A 0.8%/1.2% 1.3% / 0.3% France 08:45 Trade Balance (Apr) 4368m 08:45 Budget Balance YTD (Apr) 27.5b 08:45 Current Account Balance (Apr) 1.8b Norway 10:00 Industrial Production MoM YoY (Apr) 1.3% / 4.0% 10:00 Ind Prod Manufacturing MoM YoY (Apr) 0.5%/ 0.9% / 7.1% Spain 09:00 Industrial Output MoM YoY (Apr) 0.0%/2.5% 1.2%/2.8% Events 13:00 ECB's Makuch Speaks in Bratislava 17:00 ECB's Knot Speaks in Dutch Parliament The Netherlands DSL Auction ( 4 6B Jan2022) Austria Bond Auction ( 1.1B 1.75% Oct 2023, 0.75% Oct2026) Germany IL Bond Auction ( 1B 0.1% Apr2016) US 3Yr Notes Auction ($24B) P. 6

7 Contacts Tuesday, 07 June year td 1d 2 year td 1d STOCKS 1d US 1,73 0,02 US 0,80 0,00 DOW ,33 DE 0,08 0,01 DE 0,53 0,00 NASDAQ or Exch NQI #VALUE! BE 0,48 0,01 BE 0,47 0,00 NIKKEI ,45 UK 1,27 0,00 UK 0,32 0,01 DAX 10121, ,08 JP 0,12 0,00 JP 0,26 0,00 DJ euro ,90 USD td 1d IRS EUR USD (3M) GBP EUR 1d 2d Eonia EUR 0,331 0,007 3y 0,140 1,027 0,778 Euribor 1 0,35 0,00 Libor 1 USD 0,51 0,51 5y 0,005 1,212 0,934 Euribor 3 0,26 0,00 Libor 3 USD 0,58 0,58 10y 0,515 1,594 1,333 Euribor 6 0,15 0,00 Libor 6 USD 0,72 0,72 Currencies 1d Currencies 1d Commoditie CRB GOLD BRENT EUR/USD 1,1358 0,0016 EUR/JPY 122,28 0,96 191, ,7 50,45 USD/JPY 107,695 0,71 EUR/GBP 0,7824 0,0064 1d 2,60 0,90 0,47 GBP/USD 1,4512 0,0140 EUR/CHF 1,1029 0,0050 AUD/USD 0,7426 0,0099 EUR/SEK 9,2288 0,03 USD/CAD 1,2816 0,0158 EUR/NOK 9,2759 0,01 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