Thursday, 31 May 2018

P. 1

Rates: Focus back on eco data?

Relief on the BTP market improved risk sentiment yesterday, pulling Bunds lower together with a bounce in the oil price and stronger EMU eco data. Will we get more of the same today with EMU inflation expected to show a significant rebound? US investors might remain more sidelined ahead of a key Fed speech tonight and ISM/payrolls tomorrow.

Currencies: EUR rebounds. USD rally also stalls ahead of key resistance

Yesterday, EUR/USD was captured by a ‘post-Italy’ short squeeze. At the same time, the rally of (trade-weighted) dollar stalled ahead of the 95 resistance. This pattern of a euro rebound and some USD consolidation might continue today. USD investors might await more clues from tomorrow’s payrolls.

Calendar

• US markets ended 0.9% (Nasdaq) to 1.25% higher as risk sentiment turned for

the better. Asian stock markets record gains as well overnight with China outperforming following stronger than expected PMI’s.

• China's vast manufacturing sector grew at the fastest pace in eight months in May, according to the official PMI (51.9), easing concerns about an economic slowdown. The non-manufacturing PMI rose from 54.8 to 54.9. (Reuters)

• President Trump plans to announce as soon as today the imposition of sweeping tariffs on steel and aluminum imports from Canada, Mexico, and the EU, three people familiar with the plan said. (The Washington Post)

• US regulators have begun a major easing of the Volcker rule ban on risk-taking, proposing to give institutions much greater freedom to trade by cutting back a centrepiece of post-crisis reforms. (FT).

• Italy's President Mattarella is willing to appoint a new PM if populists are ready to resume cabinet talks, a person familiar said. 5SM Di Maio may consider an alternative FM. Much lies on the decision of League leader Salvini. (BB)

• The Bank of Canada held interest rates steady but dropped cautious language about future rate moves in a signal that higher borrowing costs could come as soon as its next meeting in July, sending the Canadian dollar higher.

• Today’s eco calendar contains US PCE deflators, Chicago PMI and weekly jobless claims. EMU inflation data and the unemployment rate will also be released. Fed Bullard, Bostic and Brainard are scheduled to speak.

Headlines

S&PEurostoxx 50NikkeiOilCRB

Gold2 yr US10 yr US

2yr DE10 yr DEEUR/USDUSD/JPYEUR/GBP

Thursday, 31 May 2018

P. 2

Focus back on eco data?

Risk sentiment improved yesterday, strengthening our belief that Tuesday’s panic selling was a short term exhaustion move. Investors adapted positions to the current Italian political stalemate, no longer ignoring the possibility that we might be heading to a new European institutional crisis (NOT our base case). Investors now wait for new impetus. Strong EMU eco data helped improving risk sentiment together with the short term relief in the BTP market. German yields added 8.3 bps (30-yr) to 12.8 bps (5-yr) on a daily basis with the belly of the curve underperforming the wings. US yields increased by 5.2 bps (30-yr) to 9.9 bps (5-yr). 10-yr yield spread changes vs Germany narrowed by 36 bps (Italy) to 20 bps (Spain). Semi-core spreads declined by up to 8 bps (France).

Asian stock markets gain ground overnight with China outperforming following stronger-than-expected PMI’s. Other risk barometers also suggest that yesterday’s easing of tensions is set to continue with the US Note future drifting lower and EUR/CHF higher. We expect a slightly lower opening for the Bund.

The eco calendar heats up. National inflation readings beat consensus by a wide margin, suggesting upward risks to today’s EMU measure (1.6% Y/Y expected from 1.2% Y/Y for headline; 1% Y/Y from 0.7% Y/Y for core). Such outcome shouldn’t go unnoticed with the ECB looking for a window of opportunity to announce the next step in its normalization process (ending APP this year). Against the background of calm on the BTP market, it could weigh further on the Bund, underperforming the US Note future. Italian political maneuvering remains of course a wildcard and we won’t buy into any ST relief rally on peripheral bond markets. A normalization of credit premiums was overdue in these stretched markets. US investors keep a close eye on April PCE deflators and May Chicago PMI, though any market reaction could be subdued ahead of speech by Fed Brainard tonight and manufacturing ISM and payrolls tomorrow. Brainard’s voice is currently seen as representing the consensus view around the FOMC table. She’ll probably suggest two more rate hikes this year, but will she keep the option of 3 open? Such outcome could weigh again on the front end of the US curve which recently corrected lower (2.6% to 2.3%, now 2.4%).

Technically: the German 10-yr yield tested key 0.18% support, while the US yield approached 2.7%. Breaks lower, especially in Germany, would signal that market’s take into account a new institutional crisis in Europe. We don’t position for such scenario and feel comforted by yesterday’s correction away from those levels.

Rates

0,05 US yield -1d2 2,41 0,095 2,68 0,1010 2,86 0,0730 3,02 0,05

DE yield -1d2 -0,65 0,115 -0,27 0,1310 0,37 0,1130 1,09 0,08

German 10-yr yield (YTD) rebounded off key support (0.18%).

US 10-yr yield approached 2.7% support. Turn in risk sentiment triggered turnaround. Can US eco data bring follow-up?

Af

Thursday, 31 May 2018

P. 3

EUR/USD: rebounds of 1.1510/50 area.

USD tradeweighted:rebopund halts ahead of 95 resistance .

EUR/USD rebounds off 1.1510/50 support area.

Yesterday, there was room for correction on the Italian risk-off trade, including in the euro. EUR/USD rebounded from the 1.1530 area to the 1.1675 area. European data were also very much OK with the German inflation rising to 2.2% Y/Y. However, the moves in the major FX (euro) cross rates were still mainly Italy-driven. EUR/USD closed the session at 1.1667 (rom 1.1540). USD/JPY was supported by higher core/US yields. The pair returned to the 109 area, but closed the day at 108. 91. None of both cross rates gave a clear sign of a trend reversal yet.

This morning, Asian markets join the risk-rebound from WS yesterday. Regional markets apparently aren’t that sensitive to the developments in Italy. EUR/USD maintains yesterday’s gain. The pair trades in the 1.1660 area. USD/JPY continues to struggle and hardly profits from the positive risk sentiment and higher USD yields.

Today, in EMU the flash May CPI takes centre stage. A rise to 1.6% is expected (from 1.2%). Core CPI is seen at 1.0% (from 0.7). Yesterday’s country data suggest upside risks. In the US, the April spending and income data, the jobless claims and the Chicago PMI will be published. The PCE deflators will also get most market attention. The rise in the core deflator expected to be modest (is an april figure, not yet May). In Italy, chances on a populist government are growing. There are tentative signs that markets are less negative on this scenario compared to a potentially aggressive election campaign. Yesterday, EUR/USD rebounded off the 1.1510/50 support as investors took profit on Tuesday’s sell-off. A short-term floor might be in place. Higher EMU inflation data might be a reason for the euro short-squeeze to go a bit further in a daily perspective. However, we are not convinced on a protracted euro rebound. 1.1830 is first intermediate resistance ahead of the 1.1996/1.20 area which we consider not easy to break. That said, the dollar is also meeting resistance ( 95 for the DXY). In this respect, the USD (USD/JPY) also needs some good news (e.g. from the payrolls).

Yesterday, EUR/GBP followed the rebound of EUR/USDP to close the day at 0.8778. This morning, gfk consumer confidence and Nationwide house prices were soft. Later today, the money supply and lending data will be published. Global sentiment might continue to drive sterling. Of late sterling gains on Italy were modest, suggesting underlying sterling weakness. This might persist ST. EUR/GBP might return to 0.88 area.

Currencies

R2 1,2155 -1dR1 1,1996EUR/USD 1,1665 0,0125S1 1,1554S2 1,1453

R2 0,9033 -1dR1 0,8968EUR/GBP 0,8778 0,0068S1 0,8628S2 0,8548

Thursday, 31 May 2018

P. 4

Thursday, 31 May Consensus Previous US 13:30 Challenger Job Cuts YoY (May) -- -1.4% 14:30 Personal Income (Apr) 0.3% 0.3% 14:30 Personal Spending (Apr) 0.4% 0.4% 14:30 Initial Jobless Claims (May 26) 228k 234k 14:30 Continuing Claims (May 19) 1733k 1741k 14:30 PCE Deflator MoM/YoY (Apr) 0.2%/2.0% 0.0%/2.0% 14:30 PCE Core MoM/YoY (Apr) 0.1%/1.8% 0.2%/1.9% 15:45 Chicago Purchasing Manager (May) 58.3 57.6 16:00 Pending Home Sales MoM/NSA YoY (Apr) 0.4%/-- 0.4%/-4.4% Canada 14:30 GDP MoM/YoY (Mar) 0.2%/2.9% 0.4%/3.0% Japan 01:50 Industrial Production MoM/YoY (Apr P) 0.3%/2.5% A 1.4%/2.4% 07:00 Construction Orders YoY (Apr) -- -4.0% UK 01:01 GfK Consumer Confidence (May) -7 A -9 01:01 Lloyds Business Barometer (May) 35 A 32 10:30 Net Consumer Credit (Apr) 1.3b 0.3b 10:30 Money Supply M4 MoM/YoY (Apr) --/-- -1.4%/2.2% 10:30 M4 Ex IOFCs 3M Annualised (Apr) -- 1.2% EMU 11:00 Unemployment Rate (Apr) 8.4% 8.5% 11:00 CPI Core YoY (May A) 1.0% 0.7% 11:00 CPI Estimate YoY (May) 1.6% 1.2% France 08:45 PPI MoM/YoY (Apr) --/-- 0.4%/2.5% 08:45 CPI EU Harmonized MoM/YoY (May P) 0.3%/2.1% 0.2%/1.8% Italy 10:00 Unemployment Rate (Apr P) 10.9% 11.0% 11:00 CPI EU Harmonized MoM/YoY (May P) 0.2%/0.9% 0.5%/0.6% Belgium 11:00 Unemployment Rate (Apr) -- 6.4% China 03:00 Non-manufacturing PMI (May) 54.9 A 54.8 03:00 Manufacturing PMI (May) 51.9 A 51.4 03:00 Composite PMI (May) 54.6 A 54.1 Events 31MAY-02JUN G-7 Finance Ministers and Central Bankers Meet in Whistler 12:00 Fed's Bullard Takes Part in MNI Roundtable in Tokyo 18:30 Fed's Bostic Speaks in Moderated Q&A in Orlando 19:00 Fed's Brainard Speaks on Economic and Monetary Policy Outlook

Calendar

Thursday, 31 May 2018

P. 5

10-year Close -1d 2-year Close -1d Stocks Close -1dUS 2,86 0,07 US 2,41 0,09 DOW 24667,78 306,33DE 0,37 0,11 DE -0,65 0,11 NASDAQ 7462,454 65,86BE 0,76 0,05 BE -0,48 0,10 NIKKEI 22246,27 227,75UK 1,26 0,06 UK 0,64 0,04 DAX 12783,76 117,25

JP 0,04 0,00 JP -0,14 0,00 DJ euro-50 3441,19 13,05

IRS EUR USD GBP EUR -1d -2d USD -1d -2d3y 0,00 2,73 1,06 Eonia -0,3570 0,00605y 0,29 2,80 1,24 Euribor-1 -0,3700 0,0010 Libor-1 1,9803 0,000010y 0,94 2,90 1,48 Euribor-3 -0,3210 0,0000 Libor-3 2,3072 0,0000

Euribor-6 -0,2690 0,0000 Libor-6 2,4700 0,0000

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

EUR/USD 1,1665 0,0125 EUR/JPY 127,02 1,51 CRB 203,29 1,48USD/JPY 108,91 0,14 EUR/GBP 0,8778 0,0068 Gold 1306,50 2,40GBP/USD 1,3286 0,0037 EUR/CHF 1,1539 0,0100 Brent 77,50 2,11AUD/USD 0,7575 0,0070 EUR/SEK 10,2763 -0,0629USD/CAD 1,2873 -0,0145 EUR/NOK 9,5421 -0,0176

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