Thursday, 1 September 2022
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•          European and US bond markets yesterday temporarily tried a cautious countermove on recent relentless sell-off. A lower than expected French CPI and soft US ADP private job growth at first looked a good enough reason for a pause in the bond market sell-off. However, hawkish headlines soon caused the forces of gravity to again take hold on interest rate markets. Despite the below-expectations French CPI, the EMU flash CPI estimate printed higher and stronger than expected at a record 9.1%. Core inflation accelerated to 4.3% from 4.1%. In a data-depended policy approach, these kind of data only reinforce the case for bold action, especially as there is little prospect for a reversal in the inflation trend anytime soon. ECB hawks including Nagel and Holzmann scored the open goal. The market almost fully discounts a 75 bps rate hike at next week’s ECB meeting. German yields again rose between 2.4 bps (30-y) and 5 bps (5-y). After a cautious start, US yields finally closed between 9.1 (10-y) and 5.1 bps higher. The move was again mainly driven by a sharp jump in real yields (+16 bps for 10-y). Fed’s Mester reiterated recent almost unequivocal hawkish MPC rhetoric as she sees a good reason for the Fed fund rate to be raised north of 4.0% early next year. She also strongly pushed back against expectations for a 2023 rate cut. The decline in oil prices (and European natural gas prices) eased financial inflation expectations, but this wasn’t enough to counterbalance the strong jumped in real yields. The 2-y yield touched 3.50% for the first time since late 2007. Tighter conditions via higher (real) yields caused US equities to further lose up to 0.88% (Dow). The EuroStoxx50 lost another 1.25%. On FX, USD gains remained modest given the rise in (real) yields and the global risk-off. DXY again failed to break the 109.30/47 cycle highs. After some nervous intraday swings, EUR/USD still closed north of the parity (1.0054).

•          Asian markets stay in risk-off mode this morning, with losses of up to 2.0% (Korea, Nikkei). China announcing a new regional lockdown (Chengdu) doesn’t help to restore confidence. Contrary to a rather mediocre performance yesterday the dollar outperforms this morning. USD/JPY (139.55) is nearing the 140 mark, touching the strongest level since 1998. EUR/USD eases to trade in the 1.002 area. USD/CNY is holding near 6.90 despite recent PBNOC action to support the yuan. Today, the US weekly jobless claims and the US manufacturing ISM might give some insight on US economic activity. However, given recent hawkish Fed guidance, a big negative surprise is probably needed to the question the strong uptrend in yields. The dollar and the euro recently found some kind of short-term balance as markets finally expect some bold anti-inflation steps from the ECB. A sustained EUR/USD rebound probably needs the prospect of an improvement in the region’s energy crisis. We’re not there yet. Still the 0.99 area proved a solid support for now.

News Headlines

•          South Korea’s trade deficit hit a new record of $9470bn in August, a near-doubling of the July deficit. A 6.6% y/y gain in exports was eclipsed by surging imports of 28.2%. The most important export driver, semiconductor shipments, fell 7.8% last month, the first decline in more than two years. Imports meanwhile soared due to elevated energy and commodity prices with SK being a net energy-importer. The rising trade deficit combined with the aggressive Federal Reserve inflation campaign help explain the South Korean won’s poor track record. USD/KRW rose 12.5% in 2022 and extended gains to 14%+ following the SK trade data this morning. USD/KRW is trading at a new record high (low for the won) around 1354.

.•         Britain’s Resolution Foundation said UK citizens are set for the biggest squeeze on living standards in a century if no measures are taken by the soon-to-be-announced new prime minister. The think tank warned that real disposable incomes could fall 10% over two years as energy costs soar. This is increasingly driving consumer protests. One grassroots movement, Don’t Pay, hopes to amass a million supporters who will cancel payments to energy companies on October 1, when the price cap is set to rise 80% to £3600. Don’t Pay is just one of a number of similar protests against the soaring cost of living and attracted more than 130.000 supporters since mid-June.


The ECB ended net asset purchases and lifted rates with a 50 bps inaugural hike. More tightening is underway. Even a 75 bps hike might be on the table at the September meeting. Germany’s 10-yr yield broke out of the corrective downward trend channel since mid-June, suggesting more upside short term.

The Fed hiked to neutral by a back-to-back 75 bps in July. The size of future moves depends on the incoming data. QT hit max speed in September. The 10y briefly dropped below the lower bound (2.70% area) of the sideways trading range, but a sustained break lower was averted. The focus is back on central bank frontloading to tackle inflation.

The euro zone’s (energy) crisis is being accompanied by an Italian political crisis, weighing down the euro. Hawkish Fed comments at Jackson Hole and the simultaneous sell-off in bonds & equities pushed the euro to new lows below parity. This year’s downward trend channel suggests more downside.

Sterling’s strong run going into the BoE meeting of August abruptly ended. The central bank hiked by 50 bps. More hikes are likely given stellar inflation, but have been priced in already. Combined with the BoE’s grim economic assessment it triggered a profit-taking move. EUR/GBP finally broke out of the corrective downward trend channel since mid-June.

Calendar & Table

Note: All times and dates are CET. More reports are available at which you may sign up to.

This document has been prepared by the KBC Economics Markets desk and has not been produced by the Research department. The desk consists of Mathias Van der Jeugt, Peter Wuyts and Mathias Janssens, analists at KBC Bank N.V., which is regulated by the Financial Services and Markets Authority (FSMA). Read the full disclaimer.

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