Headlines. Friday, 30 June Rates: German 10-yr yield ready for test of 0.5% Currencies: Dollar cannot find its composure.

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1 Friday, 30 June 2017 Rates: German 10-yr yield ready for test of 0.5% EMU inflation could beat expectations, suggesting that the sell-off of the Bund can continue at least until the German 10-yr yield tests 0.5% resistance. Risks for the US PCE deflator are on the downside of consensus. If so, it will be interesting to see whether US Treasuries can profit or not. The current repositioning and Fed Yellen s credibility might hamper gains. Currencies: Dollar cannot find its composure EUR/USD continued its rally and is now closing in on the key resistance zone which, if broken, would end the 3-yr sideways trading that followed the downtrend of the pair. We think it is too early for such a break though and thus remain cautious about the possibility of substantial short term further EUR/USD gains. Calendar Headlines US stock markets slid around 0.8% in a rising yield environment with Nasdaq underperforming as a selloff in tech stocks accelerated (-1.44%). Asian stock markets also lose up to 1% (Japan underperforming). UK PM May won parliamentary approval for her legislative program after being forced into a concession on abortion rights to stave off a defeat. This episode showed just how vulnerable May is and how quickly she can capitulate. Brexit is hurting sentiment, with both UK consumers and businesses expressing doubts about the outlook. GfK's consumer-confidence dropped to -10 in June ( 5 in May) amid political uncertainty and declining spending power. Japanese inflation reading disappointed and remain very low, both the national May readings and the Tokyo June outcomes. The June Tokyo CPI exfresh food and energy even returned to negative territory (-0.2% Y/Y). Japan s unemployment rate rose to 3.1% in May, hitting its highest level this year while the ratio of jobs to applicants continued to rise from 1.48 to 1.49 (above expectations of a stabilisation). China s official manufacturing PMI came in at 51.7 (consensus 51). The services measure also rose, to 54.9 from Economic activity is more robust than expected, giving China room to focus on financial risks and the property sector. Inflation readings are key today with Eurozone CPI (German data surprised positively yesterday) and US PCE deflator. Chicage PMI, Michigan consumer confidence (final), UK Q1 GDP (final),german unemployment and German retail sales are also on the calendar. 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 P. 1

2 Rates Friday, 30 June 2017 The genie is out of the bottle: Yields extend up-leg Bear steepening German/US yield curves continues Bunds underperform US Treasuries US yield -1d DE yield -1d Upside risks EMU inflation and US Michigan consumer confidence Downside risks Chicago PMI (Core) PCE deflator will be closely watched Core bonds can t find their composure after several central banks, amongst others the ECB and BoE, suggested in recent days that the era of unlimited liquidity providing is running to an end. The repositioning in various markets on this central bank turnaround isn t finished. European equities weakened hand in hand with the Bund and the rise of EUR/USD. The causation goes from rising yields to equities, at least for now. Higher-than-expected German inflation weighted on bonds as well. German Bunds underperformed US Treasuries. In a daily perspective, the German yield curve steepened with yields between 1.6 bps (2-yr) and 8.4 bps (10-yr) higher. The US yield curve moved in similar fashion with yield changes ranging between +1.6 bps (2-yr) and +3.9 bps (30-yr). Worth watching, the German 10-yr yield rose 20 bps in past three sessions and nears key resistance at 0.50%. On intra-emu bond markets, yield spreads versus Germany ended close to unchanged with Italy underperforming (+4 bps) ahead of today s supply operation and Greece outperforming (-15 bps). Eco calendar well filled with key inflation reports The US personal income and spending report (May) will attract a lot of attention. Spending was weak in Q1 (0.6% Q/Qa), but recovered in April (0.4% M/M) after a reasonable 0.3% M/M in March. The market expects a weak 0.1% M/M in May, which would be disappointing, but nevertheless keeps spending on track for a 2.5%+ growth in Q2. Given the decline in May CPI, we could see a small drop in the (core) PCE deflator too. This might not gone unnoticed, even though Yellen already suggested inflation readings could be subdued in the next months. The Chicago PMI reached its highest level in more than 2 years (59.4) in May. Given some weakening of the orders component, we expect a somewhat lower overall outcome for June (consensus: 58). The final Michigan consumer sentiment might be slightly revised higher from the preliminary 94.5 (based on a strong conference board confidence). Following higher than expected German (and Spanish) inflation figures, the risks for the EMU HICP inflation is on the upside of expectations (1.2% Y/Y for the headline and 1% Y/Y for the core) even as the Italian inflation surprised on the downside. Bund future (orange) and Dax (black) decline in lockstep. Higher yields weigh on stock markets German 10-yr yield: significant repositioning pushes 10-yr yield rapidly towards 0.5% resistance P. 2

3 Italy launches new 10-yr BTP R d R BUND S S The Italian debt agency taps the on the run 5-yr BTP ( 2-2.5B 1.2% Apr2022) and launches a new 10-yr BTP ( 3.5-4B 2.05% Aug2027). Grey trading suggests that the new BTP will be priced with a 2.8 bps pick-up in ASW spread terms compared to the previous 10-yr benchmark (2.2% Jun2027). That corresponds with a 6.1 bps pick-up in yield terms. The 5-yr BTP cheapened in the run-up to the auction and trades normal on the Italian curve. We expect decent auctions. Additionally, the Italian treasury will tap a floating rate CCTeu (Oct2024) for 1-1.5B. German 10-yr yield ready for test of 0.5% Asian stock markets lose up to 1% overnight, in line with WS overnight (Nasdaq underperformed). Asian eco data printed mixed with weak Japanese numbers, but strong Chinese PMI s. Brent crude slowly extends its correction higher while the rebound of iron ore accelerates. The US Note future trades with a downward bias, suggesting a neutral to weaker opening for the Bund. EMU inflation is expected to surprise on the upside of expectations after yesterday s German reading, suggesting that the sell-off of the Bund can continue at least until the German 10-yr yield tests 0.5% resistance (today). We hold our sell-on-upticks strategy as markets reposition for a new stage in the global monetary cycle: policy normalisation. The peak of central bank dovishness is behind us. The US eco calendar is modestly interesting with most attention for the PCE deflator. Risks are on the downside of consensus. If so, it will be interesting to see whether US Treasuries can profit or not. The current repositioning and Fed Yellen s credibility (subdued inflation is temporary) might hamper any gains. Any spike higher could be used in our sell-on-upticks strategy in US Treasuries as markets are too dovish positioned given the Fed s future tightening intentions. Upcoming eco data (PCE inflation tomorrow and ISM s/adp/payrolls next week) could prove pivotal in shaping expectations. The correction lower on equity markets currently doesn t create safe haven flows as losses on stock markets are inflicted by higher rates! German Bund: Sell-on-upticks. Bearish double top formation in place US Note future: Sell-on-upticks, but key US eco data ahead P. 3

4 Currencies Dollar can t find its composure in repositioning EUR/USD moves higher and away of broken resistance USD/JPY little changed as widening rate differentials balance equity weakness R d R EUR/USD S S EMU inflation to surpass consensus, but partially discounted? US eco data unable to support dollar The repositioning after Mr. Draghi turn towards the start of normalisation on Tuesday continued in various markets. The euro profited, helped by narrowing yield differentials, strong EMU economic sentiment data and higher than expected German inflation. Even equity weakness (Europe & US) favoured the euro yesterday. US eco data were near consensus and ignored. EUR/USD opened around and closed near the intraday highs at The fate of USD/JPY was different. European equity weakness had initially little impact on the pair, as higher US yields and wider rate differentials trumped weak equities and benefited the dollar. USD/JPY reached an intraday high at , but the safe haven motive took the driver s seat when WS hit the skids, allowing the yen to recover and leaving the pair little changed in the close at (versus previously). Overnight, Asian equities lose up to 1%. Japanese equities underperform on weak Japanese eco data and modest safe haven-related yen strength. Chinese PMI s were better than expected, which confirms the economic improvement. However, will markets take notice during the great repositioning? USD/JPY weakened somewhat and trades just below 112. EUR/USD is nearly unchanged at The US Personal income and spending report (May) will attract a lot of attention. The market expects a weak 0.1% M/M, which would be disappointing, but nevertheless keeps spending on track for 2.5%+ growth in Q2. Given the decline in May CPI, we might also see a small drop in the (core) PCE deflator, which might not gone unnoticed and is dollar negative. The Chicago PMI for May reached its highest level in more than 2 years (59.4). Given some weakening of the orders component, we expect a somewhat lower overall outcome for June (consensus: 58) The final Michigan consumer sentiment might be slightly revised higher from the preliminary 94.5 (based on a strong conference board confidence). Following higher than expected German (and Spanish) inflation figures, the risks for the EMU HICP inflation is on the upside of expectations (1.2% Y/Y for the headline and 1% Y/Y for the core). EUR/USD nears key resistance that if broken would make the LT trend euro positive. Difficult for now. USD/JPY: Sideways oriented as yields and yield differentials balance impact weak equities (safe haven) USD/JPY fails to convince The US eco data won t support the dollar, but higher EMU inflation may already have been partially (?) discounted after the upward surprise of German (and Spanish). Is the re-positioning on the possible change in the EMU and global turn to a more normal monetary policy over and thus will rate differentials stabilize? In that case, dollar weakening against the euro may be in for a pause/correction. We wouldn t pre-emptively position for such a scenario as the momentum in EUR/USD is still intact. The US dollar desperately needs good news (both on activity and price data) for markets to focus again more on the Fed s policy P. 4

5 normalisation process. The dollar could perhaps get more support next week, with the payrolls and ISM. Yesterday s intraday price development in USD/JPY was again disappointing. Core yields and yield differentials primed in the morning to the benefit of the dollar, before yen favourable equity weakness drove the action in the US session. We remain cautious on USD/JPY longs. Technical picture: Euro prevails, USD struggles Poor US data, US political upheaval and strong EMU eco data propelled EUR/USD higher since April, but a first test of the /66 ahead of the FOMC decision was rejected. A combination of hawkish ECB comments and weaker eco data pushed EUR/USD this week above the /66 resistance area with a new high at reached yesterday. We want a weekly close above the key resistance to consider it really broken. However, the key resistance area to watch out for is now the 1.15 area with eventual extensions to previous test of this zone at the / LT correction tops. This would end the long consolidation period that followed the sharp decline of EUR/USD in 2014/early Such a key area will be difficult to break for now. A drop below would suggest the pair enters calmer waters. No post-carney follow-through gains for sterling R d R EUR/GBP S S Following wide swings on comments by Draghi and Carney in previous days, the EUR/GBP cross rate was an area of perfect calm yesterday. The pair was locked in a very narrow range close to the 0.88 pivot. Cable followed EUR/USD higher and closed at the 1.30 level. Overnight the pair tried to force its way to the ST key resistance at , but it retreated back to the 1.30 level where it is staying now. Consumer confidence declined quite sharply in June, according to the GfK report published overnight. The Lloyds business barometer, on the contrary, improved to 30 in June from 27 previously. The report won t leave traces in the European session. Later today, the UK final Q1 GDP report will be released together with the current account, the index of services and total investment. We don t think these will affect sterling trading much. Sterling might get direction from the main crosses. All in all, we see EUR/GBP staying below the key resistance of /66 and cable s fate will depend on EUR/USD. If the cross would move higher, cable may test the resistance but a break looks unlikely. From a technical point of view, EUR/GBP set a minor top north of the /66 resistance (2017 top), but a sustained break didn t occur. Recent setbacks will probably block further gains ST. A return below the correction low would indicate easing pressure on sterling. Such a break lower will be difficult. A EUR/GBP buy-on-dips approach remains favoured. EUR/GBP: EUR/GBP topside test rejected, but danger new test not excluded. Prefer buy-on-dip GBP/USD near key resistance P. 5

6 Calendar Friday, 30 June Consensus Previous US 14:30 Personal Income (May) 0.3% 0.4% 14:30 Personal Spending (May) 0.1% 0.4% 14:30 Real Personal Spending (May) 0.2% 0.2% 14:30 PCE Deflator MoM / YoY (May) -0.1%/1.5% 0.2%/1.7% 14:30 PCE Core MoM / YoY (May) 0.1%/1.4% 0.2%/1.5% 15:45 Chicago Purchasing Manager (Jun) :00 U. of Mich. Sentiment (Jun F) Japan 01:30 Jobless Rate (May) A 3.1% 2.8% 01:30 Job-To-Applicant Ratio (May) A :30 Overall Household Spending YoY (May) A -0.1% -1.4% 01:30 Natl CPI YoY (May) A 0.4% 0.4% 01:30 Natl CPI Ex Fresh Food YoY (May) A 0.4% 0.3% 01:30 Natl CPI Ex Fresh Food, Energy YoY (May) A 0.0% 0.0% 01:30 Tokyo CPI YoY (Jun) A 0.0% 0.2% 01:30 Tokyo CPI Ex-Fresh Food YoY (Jun) A 0.0% 0.1% 01:30 Tokyo CPI Ex-Fresh Food, Energy YoY (Jun) A -0.2% 0.0% 01:50 Industrial Production MoM / YoY (May P) A-3.3%/6.8% 4.0%/5.7% China 03:00 Manufacturing PMI (Jun) A :00 Non-manufacturing PMI (Jun) A UK 01:01 GfK Consumer Confidence (Jun) A :01 Lloyds Business Barometer (Jun) A :30 Current Account Balance (1Q) -16.7b -12.1b 10:30 GDP QoQ / YoY (1Q F) 0.2%/2.0% 0.2%/2.0% 10:30 Index of Services MoM & 3M/3M (Apr) 0.2%/0.3% 0.2%/0.2% 10:30 Total Business Investment QoQ / YoY (1Q F) --/-- 0.6%/0.8% EMU 11:00 CPI Estimate YoY (Jun) 1.2% 1.4% 11:00 CPI Core YoY (Jun A) 1.0% 0.9% Germany 08:00 Retail sales (May) M/M Y/Y 0.3%/2.8% -0.2%/-0.9% 09:55 Unemployment Change (000 s) (Jun) -10k -9k 09:55 Unemployment Claims Rate SA (Jun) 5.7% 5.7% France 08:45 CPI EU Harmonized MoM / YoY (Jun P) 0.0%/0.8% 0.0%/0.9% 08:45 Consumer Spending MoM / YoY (May) 0.5%/0.9% 0.5%/-0.5% Norway 10:00 Unemployment Rate (Jun) 2.6% 2.6% Events 11:00 Italian BTP Auction P. 6

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