Monday, 07 January 2019

P. 1

Rates: Change in tone by Fed chair Powell

The stretched core bond rally fell prey to profit taking last Friday following a stellar US payrolls report and a dovish verbal turn by Fed chair Powell. He suggested readiness to alter policy to address downside eco risks. Will his genuflection be sufficient to end a volatile market period? Supply heats up this week which might weigh on bonds.

Currencies: dollar ignores strong payrolls as Powell calls flexibility in Fed policy

The dollar profited only temporarily from very strong payrolls on Friday as Fed’s Powell comforted markets as he committed to a flexible Fed policy. A positive risk sentiment and a perceived softer Fed might remain a tentative USD negative. However, EUR/USD is holding in the 1.12/1.15 trading range, for now.

Calendar

• US equities spurred higher on Friday with gains up to 4% on a strong job report

and soothing words of Fed chair Powell. Asian equities opened this week’s trading in green as well, with Japanese indices outperforming.

• The US and China start face-to-face trade talks today as a US delegation, led by Deputy Trade Representative Jeffrey Gerrish, has arrived in Beijing. Topics on the agenda are intellectual property, agriculture and industrial purchases.

• US President Trump said his demand for a wall along the US-Mexico border could be satisfied by a steel barrier instead of a concrete wall. In the meantime, the US government shutdown heads into its third week.

• China’s top planning agency has approved $125bn in rail projects across the country in the past month, as it continues fiscal spending to counteract its economic slowdown.

• The Brexit theatre wakes up from its hibernation as politicians return to Westminster today. PM May is still seeking to win over critics of her Brexit deal, as a crucial vote in Parliament is planned for next week (Jan 15?!).

• Japan’s services sector slowed in Dec. with the Nikkei PMI Services dropping to 51.0 from 52.3 in Nov., caused by poor weather and weaker demand growth. The Composite PMI declined to 52.0, down from 52.4 a month before.

• Today’s economic calendar covers only the ISM Non-Manufacturing Index (Dec) in the US, as other data is cancelled due to the government shutdown. The EMU calendar remains rather empty, with only retail sales catching our eye.

Headlines

S&PEurostoxx 50NikkeiOilCRB

Gold2 yr US10 yr US

2yr DE10 yr DEEUR/USDUSD/JPYEUR/GBP

Monday, 07 January 2019

P. 2

Powell changes tone

The stretched core bond rally since early November fell prey to profit taking last Friday. Progress in US-Sino trade talks, higher oil prices, a stellar US payrolls report (+312k; AHE 0.4% M/M & 3.2% Y/Y), strong bourses (+3.5%-4.5%) and soothing comments by Fed chair Powell did the trick. He suggested that the Fed could pause interest rate hikes or alter its balance sheet reduction scheme if perceived downside risks to the economy become reality. He remains optimistic on the current state of the US economy, but recent muted inflation outcomes might warrant a wait-and-see approach. Cleveland Fed Mester (no voter) joined that chorus. US yields increased by 7.9 bps (30-yr) to 14.4 bps (5-yr) on a daily basis. The German yield curve shifted 1.5 bps (2-yr) to 5.5 bps (10-yr) higher. 10-yr yield spreads vs Germany narrowed marginally with Greece (-6 bps) outperforming.

Asian stock markets trade positive this morning with Japan outperforming. Core bonds tread water around Friday’s lows and are no longer in overbought territory. US-Sino trade talks started today. The US government remains in partial shutdown mode as Congress squabbles over border funding. We expect a neutral start to the trading week.

Today’s eco calendar is trimmed by the US government shutdown. The only number up for release is the non-manufacturing ISM. Consensus expects a moderate setback in December, from 60.7 to 59. We see downside risks after last week’s dismal manufacturing gauge, but that shouldn’t really come as a surprise. Atlanta Fed Bostic (non-voter) is scheduled to speak, but his more dovish tone is well known. Risk sentiment will remain key for general trading. Will Powell’s genuflection be sufficient to end a volatile trading period? We think it will be the case, but it’s probably too early to trigger a complete turnaround. Bond supply is high this week with scheduled auctions in the US, the Netherlands, Austria, Germany, France and Italy. National treasuries might also want to profit from easier trading circumstances to launch new syndicated deals. Supply might weigh on core bonds and cause some peripheral spread widening throughout the week. Other trading themes this week include Fed talk, the shutdown, trade negotiations and Friday’s US CPI number.

The German 10-yr yield bounced off 0.15% support last week. That’s the final hurdle before returning to (sub)-zero levels. The US 10-yr yield lost the 2.75%-2.8% area by the end of last year, opening the path for a technical decline towards 2.5%. We approached this level last week. In both Germany and the US, we think that sufficient bad news is discounted at current levels. Policy normalization expectations in the US and EMU have become extremely dovish.

Rates

US yield -1d2 2,49 0,125 2,49 0,1410 2,67 0,1130 2,97 0,08

DE yield -1d2 -0,60 0,025 -0,33 0,0410 0,21 0,0630 0,86 0,05

German 10-yr yield bounced off 2017 low. Final technical hurdle before returning to (sub) zero levels.

US 10-yr yield lost 38% retracement level suggesting room for a further technical decline towards 2.5%

Af

Monday, 07 January 2019

P. 3

EUR/USD: USD ceding ground as Powell admits on Fed flexibility

EUR/GBP: sterling profits from risk rebound, at least temporarily

Dollar eases on Powell’s flexibility call There were plenty of eco data on both sides of the Atlantic on Friday, but the market focus was on the US payrolls and on the interview of Fed’s Powell (together with its predecessors Bernanke & Yellen). EMU data (PMI’s and CPI) were again soft but left hardly any traces on FX markets. EUR/USD hovered near the 1.14 level. The December payrolls were very strong with both job growth and wage growth beating expectations. US yields and the dollar rose, but USD gains remained modest given the magnitude of the payrolls’ beat. EUR/USD dropped to the mid 1.13 area. US gains were reversed as the headlines of Powell’s interview flashed on the screens. Powell maintained a positive view on the economy, but stressed that the Fed could be flexible if necessary, both in its interest rate policy and in managing the balance sheet. His comments triggered an outright risk rebound and propelled EUR/USD back to pre-payrolls levels. The pair closed the session little changed at 1.1395. USD/JPY was marginally supported by the rise in US yields but gains were small given the sharp risk rebound on other markets. The pair closed the session at 108.51 (from 107.68). This morning, Asian equities are joining the post-Powell risk rebound from Friday, but gains as modest compared the US rally on Friday. Even so, the dollar remains slightly in the defensive. EUR/USD is changing hands in the 1.1420 area. USD/JPY is drifting back lower in the 108 big figure. The yuan also rebounds (USD/CNY < 6.85). Later today, most US data releases will be delayed (government shutdown) but the non-manufacturing ISM will be published. A modest decline from 60.7 to 59.0 is expected. Considering the steep decline in the manufacturing measure, risk are probably to the downside. The Sino-US trade talks are a wildcard. The jury is still out whether Powell’s comments have eased market uncertainty. Even so, Powell signalling more Fed flexibility is a cautious USD negative. The modest rebound of USD/JPY on Friday also suggests some underlying USD caution. For now, the EUR/USD 1.12/1.15 trading range looks still solid, but a retest of the 1.15 barrier might be on the cards.

The risk rebound on global markets also supported sterling on Friday, with EUR/GBP closing well below 0.90. This week, the political debate on Brexit will resume ahead of a new Brexit vote that is scheduled for Jan 15. Despite recent cautiously positive GBP-momentum, we remain cautious on sterling as long as the uncertainty on the Brexit process remains as misty as it is now.

Currencies

R2 1,1815 -1dR1 1,1621EUR/USD 1,1395 0,0001S1 1,1187S2 1,1119

R2 0,93067 -1dR1 0,91EUR/GBP 0,8954 -0,0067S1 0,8700S2 0,862

Monday, 07 January 2019

P. 4

Monday, 7 January Consensus Previous US Factory orders/durables data postponed by government shutdown 16:00 ISM Non-Manufacturing Index (Dec) 59.0 60.7 Japan 00:50 Monetary Base YoY (Dec) 4.8%A 6.1% 01:30 Nikkei Japan PMI Composite (Dec) 52.0 52.4 01:30 Nikkei Japan PMI Services (Dec) 51.0 52.3 UK 10:00 New Car Registrations YoY (Dec) -- -3.0% EMU 10:30 Sentix Investor Confidence (Jan) -2.0 -0.3 11:00 Retail Sales MoM/YoY (Nov) 0.2%/0.4% 0.3%/1.7% Germany 08:00 Retail Sales MoM/YoY (Nov) 0.4%/-0.4% 0.1%R/5.0% 08:00 Factory Orders MoM/WDA YoY (Nov) -0.1%/-2.7% 0.3%/-2.7% 09:30 Markit Germany Construction PMI (Dec) -- 51.3 Events 07JAN US-Sino trade talks in Beijing 13:45 ECB's Guindos Speaks in Riga 18:40 Fed’s Bostic Speaks to Rotary Club of Atlanta (non-voter)

10-year Close -1d 2-year Close -1d Stocks Close -1dUS 2,67 0,11 US 2,49 0,12 DOW 23433,16 746,94DE 0,21 0,06 DE -0,60 0,02 NASDAQ 6738,857 275,35BE 0,76 0,04 BE -0,52 0,02 NIKKEI 20038,97 477,01UK 1,28 0,08 UK 0,76 0,06 DAX 10767,69 351,03

JP -0,01 0,02 JP -0,17 0,01 DJ euro-50 3041,85 87,19

IRS EUR USD GBP EUR -1d -2d USD -1d -2d3y -0,07 2,59 1,19 Eonia -0,3650 0,00105y 0,19 2,57 1,27 Euribor-1 -0,3630 0,0000 Libor-1 2,5206 0,007810y 0,79 2,70 1,43 Euribor-3 -0,3090 0,0000 Libor-3 2,8039 0,0089

Euribor-6 -0,2370 0,0000 Libor-6 2,8558 -0,0031

Currencies Close -1d Currencies Close -1d Commodities Close -1d

EUR/USD 1,1395 0,0001 EUR/JPY 123,64 0,97 CRB 173,35 1,80USD/JPY 108,51 0,83 EUR/GBP 0,8954 -0,0067 Gold 1285,80 -9,00GBP/USD 1,2723 0,0095 EUR/CHF 1,1244 0,0001 Brent 57,06 1,11AUD/USD 0,7113 0,0107 EUR/SEK 10,2198 -0,0352USD/CAD 1,3374 -0,0114 EUR/NOK 9,8156 -0,0848

Calendar

Monday, 07 January 2019

P. 5

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Brussels Research (KBC) Global Sales Force Mathias Van der Jeugt +32 2 417 51 94 Corporate Desk(Brussels) +32 2 417 45 82 Peter Wuyts +32 2 417 32 35 Institutional Desk(Brussels) +32 2 417 46 25 Mathias Janssens +32 2 417 51 95 CBC Desk (Brussels) +32 2 547 19 19 Dieter Lapeire +32 2 417 25 47 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) Prague +420 2 6135 3535 Jan Cermak +420 2 6135 3578 Jan Bures +420 2 6135 3574 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

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