BOE's Vlieghe ruffles his hawkish feathers

Notes/Observations

- China govt cuts the car import tax from 25% to 15%; effective July 1st

- Hawkish rate outlook by BOE's Vlieghe at his reappointment hearing; saw 1 to 2 rate hikes of 25bps per year during the 3-year policy horizon (Note: QIR saw one hike per year).

Asia:

- BoJ Gov Kuroda reiterated domestic economy expanding moderately; No particular limit in expanding monetary base. Would announce how BOJ would exit easy policy when prospects for reaching price target got closer

- BoJ Dep Gov Wakatabe: Can meet price target with current policy; may need to shift policy if changes in economic conditions make current policy inappropriate

- US and China said to reach ‘outline’ of agreement related to telecom ZTE

Europe:

- Italy Five-Star and League nominate Giuseppe Conte as prime minister

- Italy President Mattarella reportedly raised concerns about state finances in meetings today with leaders of 5-Star Party and Northern League; summoned Lower, Upper House leaders for Tuesday meeting

- UK Foreign Sec Johnson said to have warned PM May against another early election because of the turmoil of Brexit

- Germany May Finance Ministry Monthly Report: Domestic economy is in strong upturn, even if special factors meant growth in Q1 was less dynamic than in late 2017

Americas:

- Fed's Bostic (voter, dove): economy is on track and is nearing the Fed's dual goals. Supported two more rate hikes in 2018

- Fed's Harker (non-voter, moderate) expected 2 more hikes this year; could possibly support a 3rd hike in 2018 if inflation accelerated; it's important to hike rates judiciously. Let's get rates to neutral and see how things played out

- Fed's Kashkari (non-voter, dove): Wage growth hasn't picked up; might still be slack in labor market

Economic Data:

- (NL) Netherlands Apr House Price Index M/M: 0.4% v 0.3% prior; Y/Y: 8.8% v 8.6% prior

- (MY) Malaysia Mid-May Foreign Reserves: $109.4B v $109.5B prior

- (ZA) South Africa Mar Leading Indicator: 107.4 v 108.3 prior

- (CH) Swiss Apr M3 Money Supply Y/Y: 3.3% v 3.3% prior

- (ES) Spain Mar Trade Balance: -€0.8B v -€2.2B prior

- (SE) Sweden Apr Unemployment Rate: 6.8% v 6.6%e; Unemployment Rate (Seasonally Adj): 6.3% v 6.1%e

- (CH) SNB Total Sight Deposits for Week Ended May 18th (CHF): 576.4B v 576.2B prior

- (TW) Taiwan Apr Unemployment Rate: 3.7% v 3.7%e

- (UK) Apr Public Finances (PSNCR): -£9.7B v £1.3B prior; Public Sector Net Borrowing: £6.2B v £7.1Be; Central Government NCR: -£6.1B v + v £19.9B prior; PNSB (ex-banking Groups): £7.8B v £8.5Be

Fixed Income Issuance:

- (ES) Spain Debt Agency (Tesoro) sold total €1.95B vs. €1.5-2.5B indicated range in 3-month and 9-month bills

- (ID) Indonesia sold total IDR15.0T vs. IDR target in 3-month, 9-month Bills, 5-year, 10-year and 20-year Bonds

- (CH) Switzerland sold CHF304.3M in 3-month Bills; Yield: -0.849% v -0.858% prior

SPEAKERS/FIXED INCOME/FX/COMMODITIES/ERRATUM

Equities

Indices [Stoxx50 +0.2% at 3,580, FTSE +0.2% at 7,875, DAX +0.2% at 13,094, CAC-40 flat at 5,636; IBEX-35 +0.5% at 10,119, FTSE MIB +0.6% at 23,229, SMI +0.1% at 8,951 , S&P 500 Futures +0.2h%]

Market Focal Points/Key Themes: European markets opened higher and remained positive as session advanced; equities catching up after extended weekend, including Norwegian Air; oil prices support energy sector; automakers supported as China said to cut import duty for cars; earnings expected in the upcoming session include Advance Auto Parts, Clear Channel Outdoor and Kohl's

Equities

- Consumer discretionary: Bloomsbury BMY.UK +7.7% (results), Ceconomy CEC.DE -4.6% (analyst action), Norwegian Air NAS.UK +8.9% (revised offer from IAG)

- Consumer staples: Cranswick CWK.UK +6.5% (results)

- Healthcare: Evotec EVT.DE +8.2% (partnership with Celgene), UDG Healthcare UDG.UK -6.6% (results)

- Georg Fischer: Georg Fischer FI.N.CH +7.8% (analyst action)

- Industrials: Inmarsat ISAT.UK -9.1% (maritime safety monopoly ends)

- Materials: Weatherly WTI.UK -17.8% (flooding in Tschudi mine)

- Technology: Dialog Semiconductor DLG.DE -3.4% (CEO comments)

- Telecom: Altice ATC.NL +49.9% (US split), Royal KPN KPN.NL -1.6% (analyst action)

Speakers

- BOE's Vlieghe reappointment hearing stated that he saw 1 to 2 rate hikes of 25bps per year during the 3-year policy horizon (**Note: QIR saw one hike per year). Interest rates to go up very gradually over the next few years. Brexit uncertainty was having a dampening effect on some of the economy

- BOE Gov Carney testified at the Treasury Select Committee that the economy did not evolve in-line with Feb forecasts but reiterated view that Q1 economic slowdown was likely temporary. Guidance was conditional based upon economic outlook. Households and businesses understood that rates are likely to gradually rise. MPC has had rigorous discussion of publishing the interest rate path, majority was not in favor as it might feel committed to follow through for credibility reasons even if no

- MPC member Ramsden testified at the Treasury Select Committee that the central bank’s communication was working well but risks that forecasts were be viewed as promises

- MPC member Saunders testified at the Treasury Select Committee that he was not a huge fan of publishing precise forecasts each quarter

- EU's Dombrovskis: New Italian govt must keep the deficit under control (**Reminder: On May 21st reports circulated that Italy President Mattarella raised concerns about state finances in meetings with leaders of 5-Star Party and Northern League)

- Italy Stats Agency (ISTAT) maintained its 2018 real GDP growth forecast at 1.4%

- DMO publishes minutes from GEMM/Investor meetings. Nine Gilt auctions scheduled in July-Sept period (7 conventional and two Index-linked Gilt issuance). Investors split between support of new linker in range of a 25-year maturity and the reopening of 2048 line . Investor consensus for syndication of linker to be held in early-mid July period

- South Africa Treasury: 2017-18 budget deficit seen narrower compared to Feb forecasts (**Reminder: Govt raised the VAT by 100bps to 15%; effective Apr 1st (1st hike since end of apartheid)

- Thailand PM Prayuth reiterated view that elections were due at the beginning of 2019 (**Insight: In May 2014 Thailand endured a military coup with Thailand Parliament formally appointed Thai Army General Prayuth as PM in Aug of that year)

- China Foreign Ministry spokesperson: Details on trade deal with US to be 'negotiated'

- China govt said to have cut the import duty on cars from 25% to 15% (later confirmed); effective July 1st

Currencies

- USD consolidated just above its 5-month highs with dealers citing the stalling in the yield trend as a factor for the current price actions. One analyst noted that the overall USD bullish sentiment had reached levels often associated with turning points. US 10-year yield steady at 3.07%

- EUR/USD moved back above the 1.18 handle but dealers remained cautious on the Italian political situation. Italian President seems to be hesitant in confirming the proposed PM due to his lack of political experience.

- GBP/USD bounced back to approach the 1.35 handle. Hawkish rate outlook by BOE's Vlieghe at his reappointment hearing help the GBP recover. Vlieghe stated that he saw 1 to 2 rate hikes of 25bps per year during the 3-year policy horizon (**Note: QIR assumed one 25bps hike per year). GBP also aide by better Apr Public Finance data in the session.

Fixed Income

- Bund Futures trades at 158.81 down 42 ticks fading the move higher yesterday with continued downside targeting 158.55, with upside targets remaining at 159.25 then 159.42.

- Gilt futures trade at 121.38 down 34 ticks with continued momentum targeting 120.84. Upside resistance at 121.89 then 122.16.

-Tuesday’s liquidity report showed Monday's excess liquidity fell from €1.873T to €1.840T. Use of the marginal lending facility increased from €128M to €133M.

- Corporate issuance was much lighter, with Citizens coming to markets with a $300M offering.

Looking Ahead

- (PT) Portugal Mar Current Account: No est v -€0.2B prior

- (IL) Israel Apr Leading 'S' Indicator M/M: No est v 0.3% prior

- (NG) Nigeria Central Bank Interest Rate Decision: Expected to leave Interest Rate unchanged at 14.00%

- 05.30 (UK) Weekly John Lewis LFL sales data

- 05:30 (HU) Hungary Debt Agency (AKK) to sell in 3-month Bills

- 05:30 (EU) ECB allotment in 7-day Main Financing Tender

- 05:30 (ZA) South Africa to sell ZAR2.4B in 2032, 2037 and 2048 bonds

- 06:00 (UK) May CBI Industrial Trends Total Orders: 2e v 4 prior; Selling Prices: 18e v 18 prior

- 06:00 (IL) Israel Mar Manufacturing Production M/M: No est v -3.3% prior

- 06:00 (IE) Ireland Apr PPI M/M: No est v -1.5% prior; Y/Y: No est v -2.9% prior

- 06:30 (EU) ESM to sell €2.0B in 6-month bills

- 07:00 (BR) Brazil Central Bank (BCB) COPOM May Minutes

- 07:45 (US) Weekly Goldman Economist Chain Store Sales

- 08:00 (HU) Hungary Central Bank (MNB) Interest Rate Decision: Expected to leave Base Rate unchanged at 0.90%

- 08:00 (RU) Russia announces weekly OFZ bond auction (held on Wed)

- 08:05 (UK) Baltic Dry Bulk Index

- 08:30 (CA) Canada Mar Wholesale Trade Sales M/M: +0.9%e v -0.8% prior

- 08:55 (US) Weekly Redbook Sales

- 08:55 (FR) France Debt Agency (AFT) to sel €4.2-5.4B indicated range in 3-month, 6-month and 12-month bills

- 09:00 (EU) Weekly ECB Forex Reserves

- 09:00 (RU) Russia Apr Unemployment Rate: 5.0%e v 5.0% prior; Real Disposable Income Y/Y: 4.0%e v 4.1% prior; Real Wages Y/Y: 6.2%e v 6.5% prior

- 09:00 (RU) Russia Apr Real Retail Sales Y/Y: 2.4%e v 2.0% prior

- 09:00 (MX) Mexico Mar Retail Sales M/M: 0.4%e v 1.6% prior; Y/Y: 0.8%e v 1.2% prior

- 09:00 (HU) Hungary Central Bank Gov Matolcsy post rate decision statement at 09:00 ET (13:00 GMT)

- 10:00 (US) May Richmond Fed Manufacturing Index: +10e v -3 prior

- 11:30 (US) Treasury to sell 4-Week Bills

- 13:00 (US) Treasury to sell 2-Year Notes

- 15:00 (AR) Argentina Central Bank (BCRA) Interest Rate Decision: Expected to leave 7-Day Repo Reference Rate unchanged at 40.00%

- 15:00 (AR) Argentina Mar Economic Activity Index (Monthly GDP) M/M: No est v -0.2% prior; Y/Y: 2.8%e v 5.1% prior

- 15:00 (MX) Mexico Citibanamex Survey of Economists

- 16:30 (US) Weekly API Oil Inventories