Friday, 03 March 2017

P. 1

Rates: Sell-the-rumour, buy-the-fact as Yellen delivers.

Main events today are speeches by Fed vice chair Fischer and Yellen. We expect them to seal the deal for a March rate hike, which is by and large already completely discounted. We believe that there is room for some minor profit taking going into the weekend, especially if stock markets continue to correct lower.

Currencies: Dollar rally continues amid higher rates and yields

Yesterday evening’s equity correction on Wall Street deepened overnight in Asia. Fed Yellen will probably seal the March rate hike deal today, but it is largely discounted, opening the possibility for a sell the dollar before/on the fact. However, we consider it as a correction and remain dollar positive longer term.

Calendar

• US couldn’t hold on to record gains after Trump’s speech and Fed governors’

hints on a March rate hike. They corrected 0.5% lower yesterday. Overnight, losses on Asian stock markets are even slightly bigger.

• Core inflation has returned to Japan for the 1st time since 2015, with consumer prices ex. fresh food rising by 0.1% Y/Y in January. The return to positive territory was driven by energy.

• An independent gauge of activity in China’s services sector indicates growth slowed further last month, contrasting with a pick-up in bustle at the country’s manufacturers. The Caixin Services PMI declined from 53.1 to 52.6.

• Fed Governor Powell said the case for a rate increase at the US central bank’s March meeting has “come together,” joining the chorus of Fed officials signalling a hike is coming soon.

• China's leaders are expected to telegraph their willingness at this year's annual parliamentary meeting to let reforms overtake policy stimulus as their priority amid concerns over financial instability in the world's second-largest economy.

• Catalonia is organising the logistics for a referendum on independence from Spain it plans to hold by the end of September, even if it goes against the wishes of the national government, the Catalan government's foreign policy chief said.

• Today’s eco calendar contains services PMI’s/ISM in EMU (final), UK and the US. Fed vice chair Fischer speaks on monetary policy decision making and chairwoman Yellen discusses the economic outlook.

Headlines

S&PEurostoxx 50NikkeiOilCRB

Gold2 yr US10 yr US

2yr DE10 yr DEEUR/USDUSD/JPYEUR/GBP

Friday, 03 March 2017

P. 2

Core bond sell-off continues ahead of Yellen speech

Global core bonds traded with a downward bias yesterday, especially during the US session with investors further adapting to the Fed’s scenario of 3 rate hikes in 2017, starting in March. EMU inflation as expected hit the ECB’s 2% inflation target, but underlying inflation remains subdued. The headline outcome questions the ECB’s generous monetary policy, but couldn’t trigger market reaction. During US dealings, weekly jobless claims hit the lowest level since the 70s and Fed governor Powell said that the case for a March rate hike has “come together”. Core bonds took the way of the least resistance, declining with some temporary pauses. The US Note future eventually erased some of the losses in the final trading hour which coincided with a slight correction on stock markets. Oil and other commodities slid throughout yesterday’s session, but couldn’t concern bond investors.

In a daily perspective, the US yield curve shifted 1.2 bps (30-yr) to 2.8 bps (5-yr) higher. The US 2-yr yield set a new multiyear high at 1.33%. The US 5-yr tested the 2% mark. A sustained break higher would paint a bond bearish triple bottom on the charts with targets around 2.2%. The German yield curve steepened with yield changes between –0.2 bps (2-yr) and +4.6 bps (30-yr). On intra-EMU bond markets, 10-yr yield spread changes versus Germany narrowed very modestly (up to -2 bps)

US Services ISM and Yellen in the spotlight today

The US Services ISM is expected to have stabilized at a lofty 56.5. However, the manufacturing ISM accelerated in February to 57.7 from 56 previously. Both indices have a strong monthly correlation. Therefore, we put the risks on the upside of expectations for the services ISM despite its high level. The index reached a 10-yr high at 59.10 in mid-2015 and was only briefly above 60 three times in the past 20 years. The EMU final services PMI’s and the January retail sales are of less importance. No less than 5 Fed governors will appear and give their opinions on the economy and likely policy ahead of the black period that precedes the March 15 FOMC meeting. However, the key speeches will be given by Fed chairwoman Yellen and Vice-chair Fischer at 19:00 CET. Fed governors like Dudley, Williams, Brainard and Powell have prepared the road for a rate hike at the next meeting. It is now the “task” of Yellen/Fischer to seal the deal. This looks highly likely.

Rates

US yield -1d2 1,31 0,025 2,01 0,0210 2,48 0,0130 3,07 0,00

DE yield -1d2 -0,85 -0,025 -0,48 0,0210 0,31 0,0230 1,11 0,03

T Note future (blue) & S&P future (red) (intraday): T Note only profits from equity correction at final downleg stocks.

US 5-yr yield tests neckline triple bottom around 2%. A break higher suggests a move towards new cycle highs)

Core bond sell-off continues

Nearly three hikes in 2017 discounted

New high US 2-yr yield & potential triple bottom formation 5-yr yield

German yield curve steepened

Peripherals and semi-core spreads little changed

Upside risks US services ISM

EMU data of less importance

Yellen/Fischer to seal the deal?

Friday, 03 March 2017

P. 3

Sell-the-rumour, buy-the-fact if Yellen delivers?

Overnight, losses on most Asian stock markets are slightly bigger than on WS yesterday (-0.5%). The US Note future has a marginal upward bias while Brent crude is closing in on $54.72/barrel support. We expect a slightly stronger opening for the Bund.

Today’s eco calendar contains US non-manufacturing ISM (risks on the upside of expectations), but the main events are speeches by Fed vice chair Fischer and Yellen. We expect them to seal the deal for a March rate hike which is by and large already completely discounted (88% probability). Given this week’s correction lower in US Treasuries with yields at key resistance levels (2-yr 1.3%, 5-yr 2%), we believe there is room for some minor profit taking going into the weekend especially if stock markets correct lower after their latest record race. Any correction higher in US Treasuries could afterwards be used to sell-the-uptick going in the Fed meeting.

The German 10-yr yield tested support around 0.17%/0.2% this week, but a break didn’t occur. Recent developments in Greece and France improved sentiment on EMU bond markets. Longer term, we hold our bearish view also for Bunds as we expect a new “calibration” of the ECB’s QE programme in H2 2017.

R2 168,93 -1dR1 166,84BUND 164,7 -0,26S1 163,13S2 161,31

German Bund: Selling pressure via US Treasuries and rising inflation. 10yr yield bounced off key support (not on graph)

US Note future (June contract!!!): Rising probability March rate hike pulls US Treasuries lower. Room for profit taking on shorts today?”

Friday, 03 March 2017

P. 4

EUR/USD decline continued yesterday, nearing 1.0492 support, last gate before cycle lows. Risk off may make a break difficult today, unless

Yellen helps.

USD/JPY: looking to 114.94, but correcting lower overnight on risk off

USD uptrend continues, albeit a slower pace

The revived reflation trade took a breather (equities lower) yesterday. Even so, the dollar uptrend remained intact, as yields maintained an upward bias. Investors continued to adjust positions for a March Fed rate hike. The 2-yr US/German yield spread widened 4 bps to 215 bps, matching the cycle high, to close at 213 bps, after a late session “rebound” of Treasuries. The dollar rally initially shifted into a lower gear, but got extra fuel from hawkish comments of Fed Powell who explicitly mentioned a March rate hike. Some correction started late in the session. EUR/USD approached 1.0494 support and USD/JPY neared the 114.94 resistance. EUR/USD finally closed at 1.0507 (intraday low 1.0495), while USD/JPY closed at 114.41 (intraday high 114.59). The eco data (EMU inflation and US jobless claims) supported the reflation trade, but had no immediate impact on currency trading.

Overnight, the risk-off sentiment deepened. Japanese data were on the softer side and Chinese Caixin services sector and composition business sentiment were mixed versus January. Asian stocks are lower, with Japan underperforming as the yen strengthens. USD/JPY trades currently around 114.10 (from 114.41 opening). Risk off and slightly lower US yields drive the move. Commodities stabilise after yesterday’s slide, and so does EUR/USD for now (1.0514).

US Services ISM and Yellen in the spotlight today

The US Services ISM is expected to have stabilized at a lofty 56.5 in February. However, the manufacturing ISM accelerated in February to 57.7 from 56 previously and both indices have a strong monthly correlation. Therefore, we put the risks on the upside of expectations for the US services ISM despite its high level. No less than 5 Fed governors will appear and give their opinions on the economy and likely policy ahead of the black period that precedes the March 15 FOMC meeting. However, the key speeches will be given by Fed chairwoman Yellen and Vice-chair Fischer at 19:00 CET. Fed governors like Dudley, Williams, Powell and Brainard prepared the road for a March rate hike. It is now the “task” of Yellen/Fischer to seal the deal. This looks highly likely. If not, expect some panic and wild repositioning.

Currencies

R2 1,1145 -1dR1 1,0874EUR/USD 1,0521 -0,0006S1 1,0341S2 1,0000

USD under pressure versus yen, as risk off deepens, but still little changed versus euro

Upside risks US services PMI

Will Yellen/Fischer seal the deal?

Dollar extends rebounds as USD embraces rate hike expectations

Friday, 03 March 2017

P. 5

Regarding FX trading today, the service ISM may be dollar positive. As markets have now nearly completely discounted a March Fed rate hike, the risk is nevertheless for a counter-intuitive “buy-the-rumour, sell the fact” reaction in various markets before and/or after Yellen’s speech. Yesterday, some traces of such behavior were visible in the equity markets, but not yet in FX markets. The risk-off equity moves and slightly lower US yields overnight may be the precursor of what will follow today. The dollar hit key resistance levels which might also be an invitation for some dollar profit taking. We would take that as a “normal” reaction and no sign of a turnaround in the trend. In this respect, we stay dollar positive longer term and hope to be able to buy it at lower levels in case the correction is more than a superfluous event.

Global context: Over the previous days the focus shifted from US fiscal policy to the Fed’s monetary policy, as the Fed prepares markets for a rate hike in March. EUR/USD 1.0874 is a solid resistance and we favour a sell EUR/USD on upticks approach. The focus is now on the downside of the pair with 1.0494, first intermediate support ahead of the 1.0341 correction low. Too difficult to break ahead of Yellen and the weekend? The downside test of USD/JPY is also rejected. USD/JPY 111.60/111.16 (Range bottom/38% retracement of the 99.02/118.66 rally) remains key support. On the topside, 114.96 is a first point of reference, but some correction pre/post-Yellen may delay a test.

EUR/GBP fails to take out first resistance at 0.8592

Yesterday, cable slid lower for the fifth consecutive session, but the pace of the downturn slowed and cable closed around 1.2267 from 1.2293 on Wednesday evening. The intraday decline of EUR/USD was only a small and temporary help for sterling versus the euro. EUR/GBP closed at about 0.8565,virtually unchanged from the previous close (0.8579). The pair came again within reach of the 0.8592 resistance (ST top), but a real test didn’t occur. There were plenty of comments on the Brexit amendment in the Upper House. However, (FX) markets don’t see these as a hurdle for respecting the Brexit timetable.

Today, the UK February services PMI is expected to have declined slightly from 54.5 to 54.1. A negative surprise, after the miss in the manufacturing measure earlier this week, might be slightly sterling negative, but will it be enough for EUR/GBP to break above 0.8592 resistance? Sterling sentiment has softened a bit of late, but an EUR/USD rebound is likely needed to push EUR/GBP above resistance. If the euro loses further ground against the dollar and EUR/USD drops below 1.0494, a break of EUR/GBP above resistance would be difficult at this point. Early last week, the euro sell-off pushed EUR/GBP to the 0.84 area, but a sustained break lower didn’t occur. A break of EUR/GBP above 0.8592 resistance would suggest a further loss of sterling momentum. Longer term, we have a sterling negative view, as the Brexit will negatively impact the UK economy.

R2 0,8645 -1dR1 0,8592EUR/GBP 0,8579 0,0004S1 0,8304S2 0,8117

Buy-the-rumour, sell the fact?

Will Yellen/Fischer seal the deal?

EUR/GBP: testing first resistance at 0.8592.

GBP/USD going lower as upside is blocked.

Friday, 03 March 2017

P. 6

Friday, 3 March Consensus Previous US 15:45 Markit US Services PMI (Feb F) 54 53.9 15:45 Markit US Composite PMI (Feb F) -- 54.3 16:00 ISM Non-Manf. Composite (Feb) 56.5 56.5 Japan 00:30 Jobless Rate (Jan) A 3.0% 3.1% 00:30 Job-To-Applicant Ratio (Jan) A 1.43 1.43 00:30 Overall Household Spending YoY (Jan) A-1.2% -0.3% 00:30 Tokyo CPI YoY (Feb) A -0.3% 0.1% 00:30 Tokyo CPI Ex-Fresh Food YoY (Feb) A -0.3% -0.3% 00:30 Tokyo CPI Ex-Fresh Food, Energy YoY (Feb) A 0% -- 01:30 Nikkei Japan PMI Services (Feb) A 51.3 51.9 01:30 Nikkei Japan PMI Composite (Feb) A 52.2- 52.3 06:00 Consumer Confidence Index (Feb) A 43.1 43.2 China 02:45 Caixin China PMI Composite (Feb) A 52.6 52.2 02:45 Caixin China PMI Services (Feb) A 52.6 53.1 UK 10:30 Markit/CIPS UK Services PMI (Feb) 54.0 54.5 10:30 Markit/CIPS UK Composite PMI (Feb) 55.6 55.5 EMU 10:00 Markit Eurozone Services PMI (Feb F) 55.6 55.6 10:00 Markit Eurozone Composite PMI (Feb F) 56.0 56.0 11:00 Retail Sales MoM / YoY (Jan) 0.3%/1.5% -0.3%/1.1% Germany 08:00 Retail Sales MoM / YoY (Jan) 0.3%/0.7% 0%/-1.1% 09:55 Markit Germany Services PMI (Feb F) 54.4 54.4 09:55 Markit/BME Germany Composite PMI (Feb F) 56.1 56.1 France 09:50 Markit France Services PMI (Feb F) 56.7- 56.7 09:50 Markit France Composite PMI (Feb F) 56.2 56.2 Italy 09:45 Markit/ADACI Italy Services PMI (Feb) 52.8 52.4 09:45 Markit/ADACI Italy Composite PMI (Feb) 53.1 52.8 10:00 GDP WDA QoQ / YoY (4Q F) 1.1%/-- 0.2%/1.1% Spain 09:15 Markit Spain Services PMI (Feb) 55- 54.2 09:15 Markit Spain Composite PMI (Feb) 55 54.7 China 02:45 Caixin China PMI composite (Feb) 52.2 02:45 Caixin China Services (Feb) 53.1 Norway 10:00 Unemployment Rate (Feb) 3.1% 3.2% Sweden 08:30 Swedbank/Silf PMI Services (Feb) -- 61.1 09:30 Industrial Production MoM / NSA YoY (Jan) 2%/1% -1.8%/-0.9% Events 01:00 Fed's Mester Speaks on Leadership in New York 16:15 Fed's Evans and Lacker Speak on Panel in New York 18:15 Fed's Powell Speaks on Innovation and the Payments System 19:00 Fed Vice Chair Fischer Speaks in New York 19:00 Yellen Gives Economic Outlook Speech in Chicago

Calendar

Friday, 03 March 2017

P. 7

10-year td -1d 2-year td -1d Stocks td -1dUS 2,48 0,01 US 1,31 0,02 DOW 21002,97 -112,58DE 0,31 0,02 DE -0,85 -0,02 NASDAQ 5861,222 -42,81BE 0,76 0,02 BE -0,54 -0,01 NIKKEI 19469,17 -95,63UK 1,21 0,02 UK 0,12 0,01 DAX 12059,57 -7,62

JP 0,08 0,01 JP -0,28 -0,02 DJ euro-50 3384,71 -5,49

IRS EUR USD GBP EUR -1d -2d USD td -1d3y -0,08 1,86 0,66 Eonia -0,3510 -0,00105y 0,14 2,12 0,83 Euribor-1 -0,3720 0,0000 Libor-1 0,8106 0,021710y 0,74 2,45 1,23 Euribor-3 -0,3290 0,0000 Libor-3 1,0928 0,0288

Euribor-6 -0,2380 -0,0010 Libor-6 1,4063 0,0314

Currencies td -1d Currencies td -1d Commodities td -1d

EUR/USD 1,0521 -0,0006 EUR/JPY 120,16 -0,04 CRB 188,81 -2,46USD/JPY 114,2 0,02 EUR/GBP 0,8579 0,0004 Gold 1232,70 -12,70GBP/USD 1,2264 -0,0012 EUR/CHF 1,0652 0,0008 Brent 55,27 -0,88AUD/USD 0,7563 -0,0089 EUR/SEK 9,5515 0,0111USD/CAD 1,3386 0,0030 EUR/NOK 8,9141 0,0388

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 Mathias van der Jeugt +32 2 417 51 94 Institutional Desk +32 2 417 46 25 Dublin Research France +32 2 417 32 65 Austin Hughes +353 1 664 6889 London +44 207 256 4848 Shawn Britton +353 1 664 6892 Singapore +65 533 34 10 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 information is based on short term forecasts for expected developments

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.

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