Rates: Can stronger ISM already trigger new selling pressure? The first real trading session of the year features the US manufacturing ISM and German inflation data. Risks for the ISM are on the upside of expectations, while a significant pick-up in German inflation is expected as well. That could exercise new selling pressure following the upward profit taking move in the second half of December on core bond markets. Currencies: Dollar holding strong at the start of 2017 Yesterday, the dollar traded with a slightly positive bias in thin market conditions. Today, the focus will be on the German CPI data and on the US manufacturing ISM, which might be slightly supportive for the dollar. 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 markets were closed yesterday. Overnight, Asian equity markets start the year on a positive note, gaining up to 1%. Japanese markets are still closed. China s manufacturing sector continued to show signs of recovery as it grew more than expected in December (from 50.9 to 51.9), according to the CaixinMarkit manufacturing PMI. China changed the way it calculates a key yuan index, nearly doubling the number (from 13 to 24) of foreign currencies in the basket. The dollar's weight will be reduced to 22.4% from 26.4% and the euro's to 16.34% from 21.39% The December euro zone manufacturing PMI was yesterday confirmed at 54.9, coming from 53.7 in November, hitting the highest level at least since 2013. North Korea has been working through 2016 on developing components for an intercontinental ballistic missile (ICBM), making the isolated nation's claim that it was close to a test-launch plausible, international weapons experts said. The battle to represent the Socialist party in France s presidential election kicks off in earnest today with frontrunner and former prime minister Manuel Valls set to unveil his political programme and vision for the country. OPEC supply cuts officially began. Iraq said its crude exports were cut by 210,000 barrels a day, while Kuwait halted production from as many as 90 wells. Output from Russia was flat at 11.2 million barrels a day in December. Brent crude continues to trade near the cycle highs below $58/barrel. Today s eco calendar contains the UK manufacturing PMI, German inflation data and the US manufacturing ISM. P. 1
Rates EMU bonds open year positive in uneventful session Very low volume bond trading Small gains for Bunds and peripheral spread narrowing US yield -1d 2 1,19 0,00 5 1,93 0,00 10 2,45 0,01 30 3,07 0,00 Yesterday, EMU bonds started the year on a positive note, but couldn t hold on to gains and eventually closed insignificantly higher. The final EMU PMI data confirmed the ongoing improvement in business sentiment during December, but was no reason to stop a morning upturn that pushed the Bund from opening levels of 164.07 to a new rally high of 164.94. As the US, UK, Japanese and many other markets remained closed, volumes were incredibly low (about 120K for the Bund). The rally stopped around noon and some profit taking occurred later on. We wouldn t draw longer term conclusions from yesterday s price action. In a daily perspective, the German bond curve bull flattened with yields up to 1.8 bps (10-yr) lower. The 2-yr yield was marginally higher (0.6 bps). In the EMU bond market, peripheral 10-year yield spreads narrowed by 3/5 bps (Spain, Portugal, Italy). US ISM and German inflation in focus today German/French inflation to rise higher Risks US ISM on upside of expectations DE yield -1d 2-0,77 0,00 5-0,55-0,02 10 0,19-0,02 30 0,93-0,02 In EMU, the German and French December HICP inflation data will dominate the morning session. German inflation is expected to pick up to 1.3% Y/Y from 0.7% Y/Y in November (up an expected 0.6% M/M), while the French inflation is expected to have increased more modestly to 0.9% Y/Y from 0.7% Y/Y previously (0.5% M/M). Higher oil prices will be a distinct feature of the reports, while higher food prices should have an impact too. Given the huge monthly moves, we see chances to a deviation for consensus, but hesitate to choose which side it will be. As energy and food will be the main drivers, core price measures should be rather stable. That might become visible on Wednesday when EMU HICP is expected to rise to 1% Y/Y from 0.6% Y/Y previously, while the core reading is expected to stabilize at 0.8% Y/Y. During the second half of December, EMU inflation expectations edged slightly higher, while US expectations broadly stabilized (see graph), meaning that EMU long real yields declined again. In the US, the ISM manufacturing (business sentiment) index is expected to have increased further to 53.7 in December from 53.2 previously. All regional business manufacturing indices went up in December and by more than expected, with the noticeable exception of the Chicago PMI which declined. Therefore, we expect a decent report with risks to the upside of consensus. The only caveat is that our Nowcast ISM forecast sees even a small drop to 53. We keep seeing a healthy growth clip in both EMU and the US at the start of the new year. T-Note future (black) and EuroStoxx (orange) (intraday): Low volume session. Bunds gave back half of morning rally, while equities hold on to their nice gains. US and EMU 10-yr inflation expectation (swap): EMU inflation expectation climbed gently further in H2 of December P. 2
R2 165,48-1d R1 164,9 BUND 164,42 0,25 S1 162,62 S2 159,91 Strong ISM new selling trigger for US Treasuries? Overnight, most Asian stock markets start the year on a positive note with Japan still closed. The US Note future has a small upward bias though. We expect a neutral opening for the Bund. Today s eco calendar contains German inflation data and the US manufacturing ISM. Risks for the ISM are on the upside of expectations, while a significant (headline) inflation pick-up is expected as well. Such scenario could put core bond bonds under new selling pressure at the start of the week following the upward correction in the second half of December (during which Bunds outperformed US Treasuries). However, some investors could remain side-lined with US non-manufacturing ISM, ADP employment and payrolls still up for release later this week. We hold our sell-on-upticks approach in US Treasuries. Rate markets currently attach a 41.5% probability to the Fed s new scenario of 3 rate hikes in 2017. We guess more repositioning to this or an even more hawkish scenario will occur in coming weeks/months. German Bund: profit taking into year-end with Bund at first resistance (164.90). US Note future (March contract): new selling if this week s eco data beat expectations (ISM s, ADP, payrolls)? P. 3
Currencies Dollar starts 2017 with a slightly positive bias in thin trading. R2 1,0874-1d R1 1,0653 EUR/USD 1,0483-0,0040 S1 1,0352 S2 1 Asian markets trade positively Commodities and commodity currencies are well bid The dollar is losing slightly ground USD/JPY rally slows EMU inflation to jump higher US ISM expected to improve further. Data might be marginally USD supportive Dollar holding close to recent highs On Monday, US and UK markets were still closed for New year leaving European markets in thin trading conditions. The EMU manufacturing PMI was confirmed at a strong 54.9. Equities took a good start. The dollar traded with a slightly positive bias, but the moves were modest as European investors awaited guidance from the US. EUR/USD closed the session at 1.0455. USD/JPY finished the day at 117.35. Overnight, the Caixin China Manufacturing PMI rebounded from 50.9 to 51.9, while a stabilisation was expected. Asian equities show gains between 0.5% and 1.0%. The above consensus China PMI supports commodities and commodity related currencies, but weighs slightly on the dollar. USD/JPY trades in the 117.35 area, off yesterday s top around 117.65. EUR/USD returned to the high 1.04 area. The Aussie dollar gains half a big figure and trades in the AUD/USD 0.7230 area. The PBOC weakened the yuan central rate to USD/CNY 6.9498 as Chinese investors face more regulatory controls to buy foreign currency. Today,the December German HICP inflation is expected to pick up to 1.3% Y/Y from 0.7% Y/Y (0.6% M/M). French inflation is expected to have increased more modestly to 0.9% Y/Y from 0.7% Y/Y. Higher oil prices will be a distinct feature of the reports. Given the huge monthly moves, we see chances to a deviation for consensus, but hesitate to choose which side it will be. As energy and food will be the main drivers, core price measures should be rather stable. In the US, the manufacturing ISM is expected to have increased to 53.7 from 53.2. Most regional business manufacturing indices surprise on the upside in December with the Chicago PMI the exception to the rule. Therefore, we put the risks for the ISM to the upside. The data might be mixed to marginally positive for the dollar. USD: holding within reach of the cycle low EUR/ USD/JPY: USD rally slows, but picture remains constructive as pair holds above 115 area. Global context. EUR/USD touched a multi-year low at 1.0352. The USD rally petered out though going into year-end. After the Trump rally, there is already a lot of good USD news discounted. Interest rate differentials between the dollar and the euro remain very high, but didn t widen anymore of late, slowing the rise of the dollar. P. 4
Even, so, the absolute interest rate support should provide a solid USD bottom as long as US data remain good and as long as there are no profound doubts on the ability of the Trump-administration to execute a pro-growth agenda. 1.0352 is the first reference. A test of the psychological barrier of 1.00 remains possible. 1.0653/70 is a first resistance. A return north of 1.0874 would question the USD positive momentum. The technical picture of USD/JPY also improved further as the 115 area was cleared. The downside in USD/JPY looks also well protected. The USD/JPY trend might slow if equities would fall prey to profit taking. However, of late interest rate differentials were more important for USD/JPY trading than the risk-on riskoff theme. The trend remains up. R2 0,8708-1d R1 0,8668 EUR/GBP 0,8524 0,0000 S1 0,8489 S2 0,8304 EUR/GBP hovers sideways in the 0.85 area On Monday, sterling trading mostly followed the intraday moves in the dollar as UK markets were still closed. EUR/GBP dropped temporary to below 0.8500 but closed the session again north of 0.85 at 0.8517. Cable lost slightly ground and close the session at 1.2302. Today, the UK markets will reopen. The UK December manufacturing PMI is expected little changed at 53.3. This is still a decent level. However, of late, the focus for sterling trading was more on price data and on the Brexit debate. Sterling held strong in November and December, but lost some momentum in the second half of last month. The euro remains soft across the board, but EUR/GBP is holding a sideways trading pattern in the 0.85 area. For now, we see no trigger for a clear directional move. Uncertainty on the next steps in the Brexit debate make sustained sterling gains difficult in the run-up to the end of March article 50 deadline. We slightly prefer a buy-on-dips strategy in case of return action toward the 0.8300 ST range bottom. EUR/GBP holding sideways range off the 0.8330 correction low GBP/USD: Drifting back south, nearing the recent lows P. 5
Calendar Tuesday, 3 January Consensus Previous US 15:45 Markit US Manufacturing PMI (Dec F) 54.2 54.2 16:00 ISM Manufacturing (Dec) 53.7 53.2 16:00 ISM Prices Paid (Dec) 55.5 54.5 16:00 ISM New Orders (Dec) -- 53.0 16:00 ISM Employment (Dec) -- 52.3 16:00 Construction Spending MoM (Nov) 0.5% 0.5% UK 10:30 Markit UK PMI Manufacturing SA (Dec) 53.3 53.4 Germany 00:00 CPI Baden Wuerttemberg MoM (Dec) -- 0.1% 09:00 CPI Saxony MoM / YoY (Dec) --/-- 0.0%/0.8% 09:55 Unemployment Change (000's) (Dec) -5k -5k 09:55 Unemployment Claims Rate SA (Dec) 6.0% 6.0% 10:00 CPI Brandenburg MoM / YoY (Dec) --/-- 0.1%/1.0% 10:00 CPI Hesse MoM / YoY (Dec) --/-- 0.0%/0.8% 10:00 CPI Bavaria MoM / YoY (Dec) --/-- 0.0%/0.8% 10:30 CPI North Rhine Westphalia MoM / YoY (Dec) --/-- 0.0%/0.8% 14:00 CPI MoM / YoY (Dec P) 0.6%/1.4% 0.1%/0.8% 14:00 CPI EU Harmonized MoM / YoY (Dec P) 0.6%/1.3% 0.0%/0.7% France 08:45 CPI EU Harmonized MoM / YoY (Dec P) 0.5%/0.9% 0.0%/0.7% China 02:45 Caixin China PMI Mfg (Dec) A: 51.9 50.9 10-year td -1d 2-year td -1d Stocks td -1d US 2,45 0,01 US 1,19 0,00 DOW 19762,6 0,00 DE 0,19-0,02 DE -0,77 0,00 NASDAQ 5383,117 0,00 BE 0,52-0,02 BE -0,68-0,01 NIKKEI 19114,37 0,00 UK 1,24 0,00 UK 0,08 0,00 DAX 11598,33 117,27 JP 0,05 0,00 JP -0,18 0,00 DJ euro-50 3308,67 18,15 IRS EUR USD GBP EUR -1d -2d USD td -1d 3y -0,11 1,70 0,69 Eonia -0,3560-0,0270 5y 0,06 1,97 0,86 Euribor-1-0,3680 0,0000 Libor-1 0,7717 0,0000 10y 0,66 2,34 1,23 Euribor-3-0,3180 0,0010 Libor-3 0,9979 0,0000 Euribor-6-0,2200 0,0010 Libor-6 1,3177 0,0000 Currencies td -1d Currencies td -1d Commodities td -1d EUR/USD 1,0483-0,0040 EUR/JPY 123,18 0,14 CRB 192,51 0,00 USD/JPY 117,51 0,60 EUR/GBP 0,8524 0,0000 Gold 1158,30 6,60 GBP/USD 1,2298-0,0046 EUR/CHF 1,0715-0,0007 Brent 57,09 0,27 AUD/USD 0,7231 0,0021 EUR/SEK 9,5469-0,0262 USD/CAD 1,3411-0,0030 EUR/NOK 9,0506-0,0286 P. 6
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