Thursday, 1 December 2022
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•          Yesterday, EMU November headline CPI eased more than expected from 10.6% to 10.0%, but didn’t came as a surprise after member states’ data published on Wednesday. Core inflation holding stubbornly high at 5.0% even caused a temporary rebound in German/EUM yields (about 5.0 bps), but the gains were largely reversed at the close (German 2-y +2.3 bps, 30-y unchanged). Early in US dealings, US yields held a tentative upward bias going into Fed Powell’s speech even as ADP job growth (127k from 239k) eased more than expected. However, markets saw Powell’s speech as softer than expected. Inflation is still too high, but as policy tightening works with a lag, it is appropriate to reduce the pace of rate hikes in December (to 50 bps). At the same time, he stated that ‘the timing of that moderation is far less significant than the questions of how much further we will need to raise rates to control inflation, and the length of time it will be necessary to hold policy at a restrictive level.’ The Fed chair also repeated that the ultimate level of rates will likely be somewhat higher than indicated in the September dots. However, a balanced assessment on the progress the Fed Chair sees in at least some inflation components apparently caused markets to concluded that ‘somewhat higher’ doesn’t by definition mean a policy rate above 5.0%. This evidently is subject to interpretation/sentiment. Even so, US yields nosedived between 18.7 bps (5-y) and 6.6 bps (30-y). The 10-y US real yield tumbled almost 25 bps! This easing evidently didn’t pass unnoticed in other markets. US equities rose 2.18% (Dow) to 4.41% (Nasdaq). The dollar more than reversed early gains with DXY closing at 105.95 (intraday top north of 107). EUR/USD closed near 1.04. Sterling slightly outperformed the euro with EUR/GBP closing at 0.8630.

•          This morning, the risk-on continues in Asia, even as they don’t match WS. Still markets are supported as a Chinese official indicate that Covid policy is entering a new (less strict) phase. Regional indices mostly are gaining between 0.5% and 1.5%. US yields rebound marginally. The dollar eases further (EUR/USD 1.044; USD/JPY 136.4). The yuan extends is rebound (USD/CNY 7.06). Later today, the focus will be on the US data, with the October PCE deflators, the manufacturing ISM and, to a lesser extent, the weekly jobless claims. The core PCE deflator is expected to ease slightly (0.3% M/M -5.0 % Y/Y from 0.5% M/M and 5.1%). The Manufacturing ISM might be at least as important as markets will be eager to learn on the slowdown after last week sharp decline in the PMI. The headline ISM is expected to drop below the 50 (49.7 from 50.2). In a longer term perspective, market probably have discounted enough relative softness, but the trend stays strong. For the US 10-y yield (3.61%) 3.55% is a next support. In Europe, assuming the ECB raises the policy rate to 3.0% (+), how much value does this leave in a 1.90% 10-y Bund yield? The ST USD momentum also stays negative, with EUR/USD (1.045) nearing 1.05, with 1.0615 next resistance.

News Headlines

•          The London School of Economics in a study found that Brexit has added about £210 pounds, or 6%, to food bills for an average UK household. These additional costs arise from so-called non-tariff barriers that arose when the UK swapped a deep trade relationship with little to no hurdles for one that includes customs checks, rule-of-origin requirements and sanitary measures. The study finds that businesses importing from the EU have passed 50 to almost 90% of those extra charges to the UK consumer. Higher food prices mean an increase in the overall cost of living between 0.7% and 1.1%. Bank of England chief economist Huw Pill in a speech yesterday said the task of getting inflation back to the 2% target is complicated by Brexit. It puts upward pressure on prices through three channels: changes to migration, reduced competition and lower trade intensity.

•          Polish inflation unexpectedly eased in November, decelerating from 17.9% y/y to 17.4%, missing an 18% consensus estimate, according to data from the Polish Statistics Office. Food (22.3% y/y) and energy prices (36.8% y/y) are still the major driving forces. Monthly dynamics slowed from 1.8% to 0.7%. The numbers settle what little is left of the market debate whether the National Bank of Poland should resume tightening. It paused the hiking cycle at 6.75% since October even as inflation rose further. The Polish swap curve became less inverse after the CPI release. Yields fell up to 23 bps at the front end while losing 14 bps at longer tenors. The Polish zloty whipsawed but ended the day marginally stronger. EUR/PLN closed at 4.67, the weakest (strongest for the zloty) level since mid-August.


The ECB ended net asset purchases and lifted rates by a combined 200 bps since the July meeting. More tightening is underway but the ECB refrained from guiding markets on the size of future hikes. Germany’s 10-yr yield rose to its highest level since 2011 (2.5%) before a correction kicked in. Losing the neckline of the double top formation at 1.95% calls for a return towards the 1.82%/1.77% support zone.

The Fed policy rate entered restrictive territory, but the central bank’s job isn’t done yet. The policy rate is expected to peak above 5% early next year and remain above a neutral 2.5% over the policy horizon. A below-consensus CPI print strengthened some Fed members call to slow down the tightening pace, triggering a strong correction. The move below the neckline of the double top formation at 3.91% suggests a return to 3.64%/3.55% in first instance.

USD for the largest part of this year profited from rising US (real) yields and a risk-off context. Geopolitical and European recessionary risks kept EUR in the defensive even as the ECB finally started a tightening cycle. But as dollar fatigue kicked in, EUR/USD finally left the strong downward trend channel since February. After a first failed attempt, the pair is again forcing a break through resistance around 1.0341/50/68 in a sustainable way.

The new UK government’s fiscally conservative approach brought calm to the market, sterling included. But still-yawning twin deficits and rising risk premia will continue to weigh on the UK currency longer term. The Bank of England stepped up its tightening with a 75 bps rate hike, but warned simultaneously that UK money market expectations about peak cycle are way too aggressive. EUR/GBP 0.856 serves as important support.

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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