Wednesday, 16 May 2018

P. 1

Rates: US 10-yr yield hits key resistance at 3.07%

The global core bond sell-off accelerated yesterday with the US 10-yr yield testing key 3.07% resistance. Good US eco data keep the possibility of three more US rate hikes this year more than alive and suggest that the US economy could outperform this year thanks to the late cycle fiscal boost. Will today’s data already be enough to cause a break higher?!

Currencies: USD extends rebound. More interest rate support to come?

Yesterday, the dollar succeeded a good rally both against the dollar and the yen. Good US retails sales provided addition interest rate support for the US currency. Today, the eco calendar is less inspiring. However, for now there is probably no good reason to row against the USD positive tide. USD/JPY overcame the 110 barrier.

Calendar

• US stock markets closed around 0.75% lower yesterday, suffering from higher

US yields. Asian bourses are also downwardly oriented this morning, but losses are more contained.

• US President Trump’s plans to rewrite NAFTA this year looked unattainable after negotiators appeared too far apart to strike a deal before a deadline this week. (WSJ)

• SF Fed Williams, who soon becomes head of the NY Fed, reiterated that three or four rate rises this year would be the right direction for monetary policy. He sees the neutral rate (r*) at 0.5% or about 2.5% when assuming inflation. (FT)

• A senior North Korean official said Pyongyang isn’t interested in a summit with the US focused solely on denuclearization, casting doubt on the North’s willingness to proceed with a planned June 12 summit in Singapore. (WSJ)

• Japan's economy shrank by 0.6% Q/Qa, a more severe contraction than the 0.2% Q/Qa median estimate and ending a 2-yr growth run. The contraction was driven by a decline in investment, consumption and weaker exports. (Reuters)

• Australian workers endured another quarter of feeble wage growth (0.5% Q/Q) while consumer sentiment eased again, disappointing results that risk sapping economy-wide spending and restraining already-tepid inflation. (Reuters)

• Today’s eco calendar contains US housing data, US industrial production and final EMU CPI data. ECB Draghi, Praet and Coeure and Fed Bostic and Bullard speak. Germany sells bonds.

Headlines

S&PEurostoxx 50NikkeiOilCRB

Gold2 yr US10 yr US

2yr DE10 yr DEEUR/USDUSD/JPYEUR/GBP

Wednesday, 16 May 2018

P. 2

US 10-yr yield hits key resistance 3.07%

The sell-off on core bond markets accelerated yesterday. Good US eco data (retail sales and empire manufacturing) keep the possibility of three more US rate hikes this year more than alive (confirmed by SF Fed Williams and Dallas Fed Kaplan yesterday) and suggest that the US economy could outperform this year thanks to the late cycle fiscal boost. The rise in yields is mainly due because of higher real rates in the US, whereas higher inflation expectations are more at work in EMU.

US yields added 2.6 bps (2-yr) to 7 bps (10-yr) on a daily basis. The US 2-yr and 5-yr yields hit the highest levels since respectively 2008 and 2009. The US 10-yr yield temporary rose above 3.07% key resistance, but the test is ongoing. The same goes for the test of 3.22% in the 30-yr yield. The German yield curve bear steepened with yields 1 bp (2-yr) to 3.7 bps (30-yr) higher. The German 10-yr yield is ready for a test of intermediate resistance at 0.65%. 10-yr yield spread changes vs Germany ended nearly unchanged with Greece (+5 bps) underperforming.

Most Asian stock markets lose ground overnight after dismal Japanese GDP data and as North Korea pulled from talks with the South putting the June 12 Summit between US President Trump and North Korean leader Kim Jong-un in doubt. Losses remain contained though and are smaller than on WS yesterday. The US Note future is still trading with a small downward bias.

Today’s eco calendar contains US housing data and industrial production. Strong data would make the US economic rebound more tangible and could trigger a new test of 3.07% resistance via higher US real rates. The probability of a break higher clearly increased, but normally a high level trigger is necessary to cause such move. Will production data than be sufficient? Anyway, we think the relevant question is when the break will occur and not will it occur. Next strong technical resistance is in the 3.75%-3.8% area.

The EMU eco data include final CPI data. Is an upward revision possible following the large unexpected decline from the first outcome? ECB Draghi, Coeuré and Praet speak in Frankfurt at a colloquium in honour of VP Constancio. Will they give more insight in the central bank’s normalization process like Villeroy earlier this week? Technically, the German 10-yr yield bounced off key support levels (0.46%/0.48%), suggesting a return higher in the range with upper bound at 0.80%. A test of intermediate resistance at 0.65% is ongoing.

Rates

US yield -1d2 2,57 0,035 2,91 0,0610 3,07 0,0730 3,20 0,07

DE yield -1d2 -0,55 0,015 0,00 0,0210 0,65 0,0330 1,31 0,04

German 10-yr yield moves higher in consolidation range, hitting intermediate resistance at 0.65%

US 10-yr yield (long term): test of key 3.07% resistance

Af

Wednesday, 16 May 2018

P. 3

EUR/USD testing recent lows. USD momentum remains constructive.

Next support coming in at 1.1718.

EUR/GBP: drifting lower in technical trading

USD stays strong. More yield support to come?

Yesterday, the dollar rally resumed after taking a pause late last week. EUR/USD returned south after Monday’s rejected test of the 1.20 area. Mixed EMU data didn’t help the euro. US retail sales and Empire manufacturing survey were OK, supporting a further rise in core yields. US yields tested key resistance levels. Spreads versus German widened slightly, even as Bunds were also hard hit. EUR/USD kept a negative bias throughout the day, but the sell-off accelerated after the US data. The pair closed at 1.1838. USD/JPY jumped above 110 even as the rise in yields triggered a correction on US equities. USD/JPY finished at 110.35.

Overnight, Asian equities are mostly trading in negative territory, but the losses are again modest compared to the setback in the US yesterday. Japanese growth contracted at a bigger than expected 0.6% Q/Q annualized, but the impact on markets was modest. USD/JPY is holding in the 110.25 area. EUR/USD (1.1835 area) is testing the recent lows awaiting more guidance bond markets/US yields.

Today, the final April EMU CPI will be released (expected at 1.2% Y/Y). Plenty of ECB policy makers will speak in Frankfurt. In the US, production is expected strong (IP 0.6% M/M). Housing starts and permits are expected to ease slightly on a monthly basis but remain at lofty levels. Will today’s data be strong enough to pull US yields further beyond key resistances (especially 10 and 30-y)? Today’s US data are not the most important ones, but any indication of US eco strength might be enough to sustain the rise in US yields and in the dollar. Of late, we had a cautious USD positive bias. After yesterday’s price action we see no trigger to expect the dollar to change course anytime soon. EUR/USD is testing the 1.1820/25 support. Next support is coming in at 1.1718. Also keep an eye at USD/JPY. The pair clearing the 110 hurdle as US equities are correcting lower is also an indication of underlying USD strength.

Yesterday, sterling rebounded against an overall weak euro, but lost slightly ground against the dollar. UK labour data were fairly strong but wage growh was in line, leaving few clues for markets to already raise bets on an August BoE rate hike. Today, there are no important UK eco data. Some more technical trading might be on the cards. EUR/GBP might drift a bit further south within the established range, especially if EUR/USD would stay under pressure, too.

Currencies

R2 1,2598 -1dR1 1,2555EUR/USD 1,1838 -0,0089S1 1,1812S2 1,1718

R2 0,9307 -1dR1 0,9033EUR/GBP 0,8765 -0,0034S1 0,8627S2 0,8541

Wednesday, 16 May 2018

P. 4

Wednesday, 16 May Consensus Previous US 14:30 Housing Starts/MoM (Apr) 1310k/-0.7% 1319k/1.9% 14:30 Building Permits/MoM (Apr) 1350k/-2.1% 1379k/4.4% R 15:15 Industrial Production MoM (Apr) 0.6% 0.5% 15:15 Manufacturing (SIC) Production (Apr) 0.5% 0.1% 15:15 Capacity Utilization (Apr) 78.4% 78.0% Japan 01:50 GDP SA QoQ (1Q P) -0.2% A 0.1% R 01:50 GDP Annualized SA QoQ (1Q P) -0.6% A 0.6% R 01:50 GDP Deflator YoY (1Q P) 0.5% A 0.0% R 01:50 GDP Private Consumption QoQ (1Q P) 0.0% A 0.2% R 01:50 GDP Business Spending QoQ (1Q P) -0.1% A 0.6% R 06:30 Industrial Production MoM/YoY (Mar F) -- 1.2%/2.2% EMU 11:00 CPI Core YoY (Apr F) 0.7% 0.7% 11:00 CPI MoM/YoY (Apr F) 0.3%/1.2% 1.0%/1.3% Germany 08:00 CPI EU Harmonized MoM/YoY (Apr F) -0.1%/1.4% A -0.1%/1.4% Italy 11:00 CPI EU Harmonized YoY (Apr F) 0.6% 0.6% Events 14:30 Fed's Bostic to Give Economic Update 23:30 Fed’s Bullard Speaks to Media 14:00 ECB President Draghi Speaks in Frankfurt 14:30 ECB’s Coeuré Chairs a Panel in Frankfurt 16:30 ECB’s Praet Chairs Panel in Frankfurt 11:30 Germany to Sell €2bn 0.5% 2028 Bonds

Calendar

Wednesday, 16 May 2018

P. 5

10-year Close -1d 2-year Close -1d Stocks Close -1dUS 3,07 0,07 US 2,57 0,03 DOW 24706,41 -193,00DE 0,65 0,03 DE -0,55 0,01 NASDAQ 7351,627 -59,69BE 0,90 0,03 BE -0,47 0,00 NIKKEI 22731,63 -86,39UK 1,52 0,05 UK 0,84 0,03 DAX 12970,04 -7,67

JP 0,06 0,00 JP -0,13 0,00 DJ euro-50 3564,29 -1,45

IRS EUR USD GBP EUR -1d -2d USD -1d -2d3y 0,07 2,90 1,20 Eonia -0,3610 -0,00105y 0,44 3,00 1,40 Euribor-1 -0,3690 0,0020 Libor-1 1,9338 0,000010y 1,08 3,10 1,67 Euribor-3 -0,3260 0,0000 Libor-3 2,3300 0,0000

Euribor-6 -0,2710 0,0000 Libor-6 2,5006 0,0000

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

EUR/USD 1,1838 -0,0089 EUR/JPY 130,63 -0,16 CRB 203,45 -0,38USD/JPY 110,35 0,69 EUR/GBP 0,8765 -0,0034 Gold 1290,30 -27,90GBP/USD 1,3502 -0,0054 EUR/CHF 1,1854 -0,0079 Brent 78,43 0,20AUD/USD 0,7472 -0,0054 EUR/SEK 10,2813 -0,0268USD/CAD 1,2877 0,0064 EUR/NOK 9,6165 0,0356

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