Currencies: Dollar propelled higher as June rate hike is again a real option

Rates: Hawkish market re-pricing after FOMC Minutes Hawkish FOMC Minutes showed that most participants would find it appropriate to hike rates in June if labour market conditions and inflation continue to improve. The hawkish message weighed on US Treasuries with the belly of the curve underperforming. More of the same today on stronger eco data and hawkish Fed speeches? Currencies: Dollar propelled higher as June rate hike is again a real option Yesterday, the dollar was already well bid early in the session. The rise accelerated as the Minutes showed that several governors embraced the idea of a June rate hike. EUR/USD dropped to the low 1.12 area. USD/JPY regained the 110 barrier. Sterling even outperformed the dollar as markets scaled back expectations of a Brexit scenario 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 US Equities reversed its gains yesterday after the Minutes confirmed the Fed is open to raising rates in June. The Nasdaq ended 0.5% higher, but the Dow and S&P closed unchanged. This morning, most Asian shares trade lower too, while Chinese ones outperform. According to the Minutes of the April 26-27 policy meeting, Fed officials concluded that a rate hike in June was a distinct possibility if incoming data were consistent with economic growth picking up in the second quarter, labor market conditions continuing to strengthen and inflation making progress toward the 2% objective. EgyptAir said early this morning that one of its aircrafts had disappeared while flying from Paris to Egypt with 66 people aboard. The jet disappeared just 10 miles inside Egyptian airspace. The wage deals sealed by German unions so far are a bit below the levels of 2015 as so far no sector has managed to clinch an annual deal above 3%, which was the benchmark last year. Nevertheless, the deals are expected to further boost domestic demand as inflation remains at record low levels. US crude inventories rose unexpectedly last week, while gasoline and distillate inventories dropped more than forecast, EIA data showed. Initially, oil prices barely moved, but dropped lower after hawkish FOMC minutes. The Brent crude oil price trades currently around $48.25/barrel and the WTI at $47.70/barrel. Today, the eco calendar contains the UK retail sales, US jobless claims and Philadelphia Fed index. The ECB publishes the minutes of its latest monetary policy meeting and Fed s Fischer & Dudley and BoE s Vlieghe are scheduled to speak. P. 1

Rates FOMC Minutes put June rate hike firmly on the table Hawkish FOMC Minutes push yield curve higher German curve steepens EU Commission doesn t fine any country, jeopardizing its credibility US yield -1d 2 0,9083 0,0733 5 1,4127 0,1130 10 1,8818 0,1094 30 2,6789 0,0810 FOMC Minutes point firmly to June hike unless. Brexit may still prevent/postpone a rate hike DE yield -1d 2-0,5070 0,0000 5-0,3560 0,0190 10 0,1990 0,0520 30 0,8975 0,0300 Downside risks claims and upside risks Philly Fed Yesterday, global core bonds took a day off, until in the run up to and especially after the release of the FOMC Minutes. They strongly pointed to the possibility of a June rate hike on condition the economy evolved as expected and markets remained calm (Brexit may still cause volatility ahead of the referendum and the FOMC meeting). The probabilities a Fed hike in June rose to 32%, to 47% for July and to 75% for the end of year. In the FF strip curve, the greens (2018) rose by up to 13 bps. The damage to the US curve was substantial. The belly (5-to-10-yr) underperformed with yields up to 8 bps higher, while the wings (2- and 30-yr) rose by 6 bps. Changes in the German curve were more modest, also as the cash market closed earlier. The curve bear steepened with yields up between 0.2 bps (2-yr) and 5 bps (30-yr). Final EMU CPI data were confirmed. In the US session, global core bonds came under new downward pressure. Oil and stock markets lost some ground but didn t impact trading. The US 2-yr/10yr spread differential reached a new cycle low at 93 bps. The April FOMC Minutes were interesting as they went beyond the statement released after the meeting. Most officials judged it likely would be appropriate to raise rates in June provided incoming data were in line with second quarter pickup, the labour market continued to strengthen and inflation progressed towards the Fed s 2% goal. It followed a string of regional Fed governors who spoke quite hawkish, often referring to the June or July meeting. So a move in June is on the table, but data dependent and for some the upcoming Brexit may still tip the odds towards a future (July?) meeting. Philly Fed and Fed speakers: eye-catchers The euro zone eco calendar is empty, Last week, US initial jobless claims rose for a third consecutive week, reaching its highest level in more than a year and nearing the 300 000 level. For last week, the consensus is looking for a significant drop, from 294 000 to 275 000 as the previous week s data were probably boosted by the Verizon strikes. We believe therefore that even a lower outcome is not excluded as the labour market recovery seems to remain on track. The Philadelphia Fed manufacturing index has been volatile in the last two months. After a significant increase in March, it was almost entirely reversed in April. For May however the consensus is looking for a limited increase from -1.6 to 3.0. We believe that the risks are for an upward surprise as general sentiment in the sector seems to have improved somewhat recently. ECB releases the Minutes of its previous meeting, but they should uneventful. US-Germ T-Note future (black) & S&P future (orange) (intraday): FOMC Minutes push Treasuries and equities lower FF strip curve: Curve shifts upwards and steepens as markets discount a steeper tightening path P. 2

U R2 165-1d R1 164,4 BUND 163,11-0,9400 S1 161,46 S2 160,81 German 10-yr Bund auction The German Finanzagentur auctions the on the run 10-yr Bund ( 4B 0.5% Feb2026). Total bids averaged only 3.9B at the previous 6 Bund auctions. Given that German yields remain near record lows, there s a good chance that today s auction will be undersubscribed as well. In the run-up to this tap, the bond cheapened marginally in ASW spread terms, while also trading rather cheap at the 10-yr part of the German curve. Stronger data and hawkish Fed: negative for bonds Overnight, most Asian equity markets trade up to 1% lower with China slightly outperforming. Brent crude loses more ground on the back of dollar strength and currently trades just above $48/barrel. The US Note future trades around yesterday s hawkish post-fomc Minutes (see above) lows. Today s eco calendar contains weekly claims and Philly Fed index. Risks are on the upside of expectations which is a negative for US Treasuries. However, the spotlight will be on Fed speakers. Both Vice-chair Fischer and NY Fed Dudley talk on monetary policy/the economy. They are heavyweight governors, who are close allies to Fed chairwoman Yellen. Will they confirm the hawkish tone of yesterday s Minutes or leave the honor to Yellen herself at the June 6 speech? We think that especially Fischer is ready to normalize policy further which could be an additional negative for US Treasuries with more underperformance of the belly of the US yield curve. The US 5-yr yield is currently testing 1 st support at 1.4% (neckline double bottom with final target at 1.67%). Technically, the Bund remains in the sideways channel between 160.81 and 164.60. In yield terms, 0.07% is key support for the German 10-yr yield. The US Note future trades in a similar range between 128-01+ and 131-14. We would sell on upticks near the resistances for a move back deeper in the range. German Bund (160.81 to 164.60): New sell-on-upticks around the upper bound US Note future: Headling towards 128-01+ on hawkish Fed P. 3

Tion Currencies R2 1,1616-1d R1 1,1447 EUR/USD 1,121-0,0075 S1 1,1144 S2 1,1058 Dollar profits from Fed minutes as a June/summer rate hike becomes a real option. Today, the calendar is thin in Europa The US data are interesting, but USD traders will look out for the comments from key Fed speakers Dollar jumps as Fed raises chances of a June rate hike On Wednesday, the dollar initially traded with a slightly positive bias ahead of Fed Minutes and was propelled higher across the board after the Minutes put a June rate hike on the table and Us yields jumped higher. Most Fed members favoured a June rate hike if the improvement in the labour market continued and if inflation continues to move to target. EUR/USD closed the session at 1.1216, from 1.1313 previously and testing a fist key support at 1.1217. USD/JPY jumped higher and finished the session at 110.19 from 109.14. Overnight, most Asian equity indices trade in negative territory. The combination of higher (US) yields, a stronger dollar and a decline in commodity prices weighs. Remarkably, Japanese stocks declined even as USD/JPY regained the 110 barrier. The negative impact on commodity and energy stocks apparently outweighs the positive effects for other sectors. China outperforms on domestic reform headlines. The combination of a stronger dollar and a setback in commodities weighs on the likes of the Aussie dollar. AUD/USD trades currently at 0.72. EUR/USD joined the global USD rally and declined to trade in the low 1.12 area currently. Today, the euro zone eco calendar is thin. In the US the jobless claims and Philly Fed index will be released. The ECB will publish the minutes of latest monetary policy meeting. Last week, US initial jobless claims rose for a third consecutive week, reaching its highest level in more than a year. For last week, the consensus is looking for a drop from 294 000 to 275 000. We believe that even a lower outcome is possible. The Philly Fed manufacturing index has been volatile of late. A significant increase in March was almost entirely reversed in April. For May however the consensus is looking for a limited increase. We believe that the risks are for an upward surprise as general sentiment in the sector improved somewhat recently. Last but not least, markets will keep a close eye at the comments from Fed governors Fischer and Dudley. They will probably keep a rather balanced approach, but won t overthrow the build-up in rate expectations for a Summer/June rate hike. So, the US data and the Fed comments might help the dollar to maintain its recent positive momentum and help it to further gains versus euro and yen. EUR/USD: tests first important support in the low 1.12 area USD/JPY: rebounds north of 110 barrier P. 4

Technically, EUR/USD broke temporary above the 1.1495 MT range top on broad-based USD weakness two weeks ago. This break was a technical warning for potential further dollar losses. However, the USD decline petered out despite mixed US eco data. The dollar was gradually supported by less soft Fed speak, keeping the door open for a June rate hike. Yesterday s minutes gave the dollar additional interest rate support. We maintain our view that the US economy is strong enough to allow the Fed to implement two rate hikes later this year. IF the eco data raise the chance for a June rate hike, the dollar might stay well supported short-term. EUR/USD currently tests a first support at 1.1217. A sustained break would open door to the 1.1144. Overall USD weakness and the inability of the BOJ to stop the rise of the yen pushed USD/JPY to new lows two weeks ago. Verbal Japanese interventions to stop the rise of the yen and a rebound of the dollar blocked the downside of USD/JPY. The USD/JPY cross rate held up fairly well of late and was further supported by yesterday s Fed Minutes. The USD/JPY rebound is in the first place USD-driven. We look out how far this rebound has to go. The high 111 area is a first important resistance. A sustained rise in USD/JPY might run into resistance if global risk sentiment would worsen (due to higher US rates or other event risk). Sterling rebounds as Brexit fears ease R2 0,8117-1d R1 0,7993 EUR/GBP 0,769-0,0124 S1 0,7735 S2 0,7652 On Wednesday morning, we expected the UK labour market data to be the dominant factor for sterling trading. The UK labour data were good. Employment growth was stronger than expected, wage growth mixed and the unemployment rate stabilized at a multi-year low of 5.1%. Even so, sterling lost temporary a few ticks, but the setback was soon reversed due to Brexit polls. A new second poll giving a lead for the remain gave sterling a shot in the arm. EUR/GBP dropped sharply lower, even below the 0.7735 support, and closed the session at 0.7683 (from 0.7823). Part of this move was due to the decline of EUR/USD. Cable closed the session at 1.4599 from 1.4463. So sterling outperformed the rising dollar. The market was clearly repositioning for a reduced Brexit risk! Today, the UK retail sales are expected to rebound 0.6% M/M after a poor performance last month. A positive figure might be a slightly positive for sterling, but the focus will be on the Brexit developments. Of late, the sterling negative momentum eased after the pair set a top north of 0.81. A counter move occurred last month and threatened to deteriorate the picture. However, a first sterling rebound petered out. Weakening UK eco data and uncertainty on the referendum weighed on sterling. Over the previous days, markets adapted positions to a lower probability of a Brexit as polls showed a positive momentum for the remain camp. EUR/GBP dropped below a first range bottom at 0.7735. A confirmation of this break would call of the short-term sterling negative moment and make the picture neutral again. EUR/GBP drops below first support as Brexit fear wanes GBP/USD: sterling outperforms rising USD P. 5

Calendar Thursday, 19 May Consensus Previous US 14:30 Chicago Fed Nat Activity Index (Apr) -0.20-0.44 14:30 Initial Jobless Claims (May 14) 275K 294k 14:30 Continuing Claims (May 7) 2158K 2161k 14:30 Philadelphia Fed Business Outlook (May) 3.0-1.6 15:45 Bloomberg Consumer Comfort (May 15) -- 41.7 16:00 Leading Index (Apr) 0.4% 0.2% Japan 01:50 Housing Loans YoY (1Q) A 1.9% 2.2% 01:50 Machine Orders MoM YoY (Mar) A 5.5%/3.2% -9.2%/-0.7% 08:00 Machine Tool Orders YoY (Apr F) -- -- UK 10:30 Retail Sales Ex Auto Fuel MoM YoY (Apr) 0.6% / 2.0% -1.6% / 1.8% 10:30 Retail Sales Inc Auto Fuel MoM (Apr) 0.6% / 2.5% -1.3% / 2.7% EMU 10:00 Current Account SA (Mar) -- 19.0b 11:00 Construction Output MoM YoY (Mar) -- -1.1% / 2.5% France 07:30 ILO Unemployment Rate (1Q) A 10.2% 10.3% 07:30 Mainland Unemp. Change 000s (1Q) A -3k -47k 07:30 ILO Mainland Unemployment Rate (1Q) A 9.9% 10.0% Norway 10:00 Trade Balance NOK (Apr) -- 9.1b Sweden 09:30 Total No. of Employees YoY (1Q) -- 2.5% Events 13:30 ECB account of the monetary policy meeting 15:15 Fed s Fischer Speaks in New York 16:30 Fed's Dudley Speaks on Macroeconomic Trends in New York 19:00 BoE s Vlieghe Speaks in London Spain Bono Auction (0.25% 2019, 1.8% 2024, 1.95% 2030) France OAT ( 6.5B 0% 2019 & 0% 2021) & IL OAT (0.1% 2019, 0.1% 2025, 0.7% 2030) Auction Sweden IL Bond Auction(SEK0.7B 0.125% 2026 & SEK0.3B 0.125% 2032) P. 6

Contacts 10-year td - 1d 2 -year td - 1d STOCKS - 1d US 1,88 0,11 US 0,91 0,07 DOW 17527 17526,62 DE 0,20 0,05 DE -0,51 0,00 NASDAQ for Exch - NQI #VALUE! BE 0,59 0,05 BE -0,47 0,01 NIKKEI 16658 16657,99 UK 1,44 0,07 UK 0,41 0,05 DAX 9943,23 9943,23 JP -0,07 0,03 JP -0,23 0,02 DJ euro-50 2956 2956,43 USD td -1d IRS EUR USD (3M) GBP EUR -1d -2d Eonia EUR -0,337-0,003 3y -0,110 1,128 0,872 Euribor-1-0,35 0,00 Libor-1 USD 0,51 0,51 5y 0,035 1,340 1,043 Euribor-3-0,26 0,00 Libor-3 USD 0,59 0,59 10y 0,575 1,718 1,470 Euribor-6-0,14 0,00 Libor-6 USD 0,73 0,73 Currencies - 1d Currencies - 1d Commoditie CRB GOLD BRENT EUR/USD 1,1211-0,0074 EUR/JPY 123,62 0,33 185,8556 1253,01 48,06 USD/JPY 110,33 1,05 EUR/GBP 0,769-0,0125-1d 1,27-20,59-1,37 GBP/USD 1,4569 0,0134 EUR/CHF 1,1078-0,0011 AUD/USD 0,7193-0,0085 EUR/SEK 9,3605 0,03 USD/CAD 1,3079 0,0144 EUR/NOK 9,3433 0,09 Brussels Research (KBC) Global Sales Force Piet Lammens +32 2 417 59 41 Brussels Peter Wuyts +32 2 417 32 35 Corporate Desk +32 2 417 45 82 Joke Mertens +32 2 417 30 59 Institutional Desk +32 2 417 46 25 Mathias van der Jeugt +32 2 417 51 94 France +32 2 417 32 65 Dublin Research London +44 207 256 4848 Austin Hughes +353 1 664 6889 Singapore +65 533 34 10 Shawn Britton +353 1 664 6892 Prague Research (CSOB) Jan Cermak +420 2 6135 3578 Prague +420 2 6135 3535 Jan Bures +420 2 6135 3574 Petr Baca +420 2 6135 3570 Bratislava Research (CSOB) Marek Gabris +421 2 5966 8809 Bratislava +421 2 5966 8820 Budapest Research David Nemeth +36 1 328 9989 Budapest +36 1 328 99 85 ALL OUR REPORTS ARE AVAILABLE ON WWW.KBCCORPORATES.COM/RESEARCH 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