Wednesday, 12 September 2018

P. 1

Rates

-0,5

0

0,5

1

1,5

2

2,5

3

3,5

Swap Rates (%)

EUR 5Yr Swap Rate US 5Yr Swap Rate

-0,4

-0,3

-0,2

-0,1

0

0,1

0,2

0,3

EURIBOR 3M

July ECB Meeting (26/07) Actual (11/09) June ECB Meeting (14/06)

The US 5-yr swap is retesting 3%, triggered by the unexpectedly strong economic boost coming from fiscal stimulus. Its European counterpart has stabilized after it

corrected lower due to the ECB’s “lower for longer” interest rates.

In June, the ECB pulled the plug on the money market. If anything, the Euribor 3M strip curve flattened further.

Markets currently expect positive rates only by mid-2020.

-1

-0,5

0

0,5

1

1,5

2

2,5

Policy Rates

ECB FED BOE ECB Deposit

-0,5

0

0,5

1

1,5

2

2,5

EURIBOR 3M / USD LIBOR 3M

EURIBOR3M USD LIBOR 3M

At the latest meetings, both the Fed and ECB held rates stable. The BoE seized the (data)moment and increased rates in

August by 25 bps.

The US 3M libor rate stabilizes around 2.35% after the surge at the start of the year because of higher US bill supply,

repatriation of US tax money and adapting to a faster Fed tightening cycle.

Markets

Wednesday, 12 September 2018

P. 2

Currencies

1

1,05

1,1

1,15

1,2

1,25

1,3

EUR/USD

0,65

0,7

0,75

0,8

0,85

0,9

0,95

EUR/GBP

EUR/USD recovered from the 1.1550 breach mid-August (USD strength following EM stress). For now, the pair is blocked

within a tight 1.15/18 consolidation pattern.

As the deadline approaches, sterling is increasingly sensitive to Brexit. However, real Brexit progress has yet to be made

and keeps the pound in the defensive.

-0,25

0,00

0,25

0,50

0,75

1,00

1,25

1,50

1,75

2 3 4 5 6 7 8 9 10 11 12 15 20 25 30

Euro Swap Curve

11/09/2018 11/08/2018 11/07/2018

0

50

100

150

200

250

300Intra-EMU Yield Spreads (10Yr)

Spain Italy Belgium France

The EMU swap curve bear steepened marginally following an obvious flattening caused by the dovish ECB guidance on

rates and risk aversion related to the US-Chinese trade conflict.

Spreads eased from the Italian (and Spanish) political turmoil. However, for Italy the genie is out of the bottle. Markets

cautiously await the government’s deficit spending intentions.

Wednesday, 12 September 2018

P. 3

95

100

105

110

115

120

125

130

USD/JPY

25

25,5

26

26,5

27

27,5

28

EUR/CZK

USD/JPY oscillates around the well-known 111-level as overall risk aversion triggers safe haven flights to both

currencies and keeps the pair balanced.

The Czech central bank increased rates in August and is expected to do so again in September. The Czech koruna

strengthened as markets are anticipating to a central bank committed to policy normalisation.

300

305

310

315

320

325

330

335

EUR/HUF

4

4,1

4,2

4,3

4,4

4,5

4,6

EUR/PLN

EUR/HUF left the 305-315 trading range and found higher ground following Orban’s election victory and during the

emerging market turmoil. Despite a slightly less dovish NBH (guidance) stance, rate hikes are still far off.

The zloty took a hit as the dollar firmed on the back of many emerging market currencies. Furthermore, the NBP has no

intention at all to normalize policy any time soon.

Wednesday, 12 September 2018

P. 4

Others

140

160

180

200

220

CRB Commodity Index

1250

1500

1750

2000

2250

2500

2750

3000

280

300

320

340

360

380

400

420

Equity Indices

Euro Stoxx 600 (L) S&P 500 (R)

Commodity prices show tentative signs of stabilizing after trending further south, asserting the typical inverse relation

with a stronger dollar. Commodities are especially vulnerable to the trade war developments.

European and US stock markets show some divergence lately, suggesting an asymmetric impact of trade war

tensions and highlighting a split in economic performance.

20

30

40

50

60

70

80

Brent Crude Oil (Future) - ($/barrel)

1050

1100

1150

1200

1250

1300

1350

1400

Gold (Future) - $/ounce

Despite OPEC’s decision to ramp up supply, oil prices have risen due to tightening global supply as Iranian exports decline

following US sanctions and hurricanes threatening offshore rigs.

The drop of the gold price shows tentative signs of stabilising with the USD rally halting for now and volatility on global

equity markets protecting the downside rather well.

Wednesday, 12 September 2018

P. 5

Eurozone

-10

-5

0

5

10

15

-1

0

1

2

3

4

Euro zone Inflation

CPI - Y/Y (Left axis) Core CPI - Y/Y (Left axis) EC Industrial confidence - selling price expectations (Right axis)

8

8,5

9

9,5

10

10,5

11

11,5

-10

-5

0

5

10

15

20

25

Euro zone Unemployment

Services Confidence - Employment Expectations(Left axis) Industrial Confidence - Employment Expectations (Left axis)

Unemployment Rate (Right axis)

Both EMU headline and core inflation edged lower to 2.0% Y/Y

and 1.0% in August. Oil effects are likely to keep headline inflation also higher in the coming months. Core inflation

however indicates the ECB is still far off target.

The euro zone unemployment rate stabilizes recently at 8.2% in July, the lowest level since November 2008. However,

surveys (PMI sub-indicators amongst others) suggest that future decline is likely.

-1,5

-1

-0,5

0

0,5

1

1,5

2

Euro zone GDP (Q/Q contribution to growth)

government household gross fixed capital formation change in inventories exports imports GDP Q/Q

505152535455565758596061

Euro zone PMI Manufacturing (blue) & Services (red)

EMU growth reached 0.4% Q/Q and 2.1% Y/Y in Q2 2018, down from 2.5% Y/Y in Q1 as slack remained omnipresent.

Growth momentum peaked in 2017. However, it should remain above trend in coming years.

Manufacturing PMI continued its decline to 54.6, suggesting ongoing trade war fears. Services PMI increased slightly in

August, from 54.2 to 54.4.

Economic Overview

Wednesday, 12 September 2018

P. 6

-1,5

-1

-0,5

0

0,5

1

1,5PositiveSurprise

NegativeSurprise

Surprise index: measures the difference (in standard deviations) between the (median) Bloomberg consensus and the actual outcome of EMU economic data.

Euro zone’s data surprises were roughly balanced, in line with only moderate economic performance.

-1

0

1

2

3

4

5

6

Euro zone Industrial Production

Industrial Production Y/Y

0

0,5

1

1,5

2

2,5

3

3,5

4

4,5

Euro zone Retail Sales

Retail Sales Y/Y

Industrial production decreased -0.1% Y/Y, the worst performance since February 2017. Germany and Italy led the decline, showing weak production in manufacturing, mining

and capital goods.

July retail sales slowed to 1.1% Y/Y, down from an upwardly revised 1.5% in June as electrical goods sales and internet

orders disappointed.

Wednesday, 12 September 2018

P. 7

US

-1

0

1

2

3

4

30

40

50

60

70

80

US Inflation

Manufacturing ISM - prices paid index (Left Scale) US CPI Y/Y (Right Scale) US Core CPI Y/Y (Right Scale)

3,75

4

4,25

4,5

4,75

5

5,25

5,5

5,75

-50

0

50

100

150

200

250

300

350

US Unemployment

Change in private payrolls (Left Scale) US unemployment rate (Right Scale)

US headline CPI stabilized at 2.9% Y/Y in July. Core measures (2.4% Y/Y) trended further north of the 2.0%-target.

However, for now the Fed holds on to its gradual approach.

August payrolls (again) displayed ongoing strength on the US labour market. Wages picked up at the fastest pace since 2009

(2.9% Y/Y). Is labour market tightness (finally) kicking in?

-2

-1

0

1

2

3

4

5US GDP (Q/Q Annualized - contribution to growth)

Personal Consumption Fixed Investments Change in inventories Net Exports Government Consumption US GDP Q/Q Annualized

85

90

95

100

105

110

115

47,5

50

52,5

55

57,5

60

62,5US ISM Manufacturing - Services

ISM non-manufacturing (Left Axis) ISM Manufacturing (Left Axis) NFIB Small Business Optimism (Right Axis)

The US economy grew by a whopping 4.2% Q/Qa in Q2 2018. Personal consumption rebounded from a sloppy Q1. The negative contribution from inventories is expected to

reverse in Q3.

US Business sentiment indicators suggest ongoing economic strength as ISM’s in August rebounded sharply from July’s dip.

NFIB optimism even set a record high (108.8).

Wednesday, 12 September 2018

P. 8

-3

-2

-1

0

1

2

3

4

US Production

1

2

3

4

5

6

7

US Retail Sales

US factory production recovered in June from May’s decline (-0.8% M/M) and stabilized July with a mere 0.1% increase

on a monthly basis.

Private consumption started Q3 on a decent note as headline US July retail sales rose 0.5% M/M. Core measures (excluding

cars and or energy) picked up 0.6% M/M.

Surprise index: measures the difference (in standard deviations) between the (median) Bloomberg consensus and the actual outcome of US economic data.

US economic data: most recent data batch surprised markets positively and suggests strong economic performance going forward.

Wednesday, 12 September 2018

P. 9

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

ALL OUR REPORTS ARE AVAILABLE VIA OUR KBC RESEARCH APP (iPhone, iPad, Android) 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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