Monday, 2 Mai 2022
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•          The balance between growth and inflation still was the talk of the town on Friday and will likely continue dominating the debate. EMU growth slowed to 0.2% Q/Q from 0.3% resulting in a 5.0 Y/Y. Few details on the composition of were available yet. However, ‘anecdotic’ evidence suggests that even the hoped for post-covid rebound in contact related activities/services is eroded by the cost of living crisis. In the respect, EMU April inflation ‘stabilized’ at 7.5% Y/Y, but core inflation again accelerated faster than expected from 2.9% to 3.5%, an indication that price rises are affecting activity in ever more profound way. Markets concluded that this imbalance only can be addressed by more decisive CB action. The German yield curve bear flattened with yields rising between 6.3 bps (2-y) and 3.8 bps (10 & 30-y). The 10-y EMU inflation swap closed at a historic top of 3.14%!! It can only be seen as a de-anchoring of inflation expectations. US eco data were mixed, but a faster than expected rise in the employment cost index (1.4% from 1.0%) forced US interest markets to a similar conclusion. US yields jumped between 11.6 bps (5-y) and 9.7 bps (2-y). One difference compared to Europe, the rise was driven by a sharp rise in real yields (10-y +15 bps). The latter, combined with uncertainty on future corporate results, hammered US equities with the Nasdaq ceding 4.17%! EMU stocks still closed with limited gains (EuroStoxx 0.68%). In theory, the rise in US real yields could have been a positive for the dollar. However, after the recent astonishing rally, the greenback fell prey to modest profit taking. The DXY index closed just below 103 (open 103.61). USD/JPY finished at 129.70. Even the euro regained some ground closing at EUR/USD 1.0545 (from 1.0499 on Thursday). Still, the picture remains very fragile. Sterling slightly outperformed the euro (EUR/GBP close 0.8388) as investors were counting down to this week’s BOE policy decision.

•          Poor China PMI’ published this weekend (composite 42.7 from 48.8, services tumbling from 48.41 to 41.9) confirmed that Covid lockdowns in major Chinese cities taking a big toll on growth. Chinese equity markets are closed for the Labour day Holiday, but the data don’t help to restore confidence on the back of Friday’s WS sell-off. The offshore yuan (USD/CNH 6.683) is losing further ground. European equity futures are indicating losses of 1.0%. The dollar already regains part of Friday’s correction and US yields remain upwardly oriented. Today, the US Manufacturing ISM and the EC confidence data will be published. US data recently held up quite well and the ISM is still expected to rise marginally to 57.6. EC economic confidence is captured in a downtrend and a further erosion from 108.5 to 108 is expected. Negative surprises can put further pressure on equities, but we don’t expected a sustained decline in US or European yields yet. Several central banks this week are expected to step up their efforts to arrest inflation (RBA tomorrow, Fed Wednesday, BoE and Czech central bank on Thursday). The Norges Bank (Thursday) is expected to take a pause. A fragile risk sentiment and decisive Fed action probably will keep the dollar supported. The absence of an unambiguous ECB commitment, keeps the door open for EUR/USD return action toward the 1.0341 2017 low.

News Headlines

•          Rating agency S&P affirmed the Czech Republic’s AA- rating with a stable outlook. The Russian war in Ukraine triggered a downward revision for this year’s growth forecast from 4% to 1.8%, but for now is no reason to downgrade the Czech rating. If the conflict has an even bigger economic effect, it could nevertheless become the case. Especially should monetary and fiscal authorities reverse their tightening stances currently in place to rein in high and rising inflation. Low government and external debt, combined substantial FX reserves provide a solid buffer for the Czech rating. The Czech koruna barely suffered a setback last week despite the combination of rising rates and crashing stocks. EUR/CZK changes hands around 24.60.

•          Hungarian Cabinet minister Gulyas said that Hungary will never support sanctions against Russia to the field of energy. The EU is preparing a phased-in proposal to end reliance on Russian energy by the end of the year or potentially even sooner. German presidential advisor Kukies told the FT that Germany needed a few months to prepare for an end to Russian crude shipments. The EC is currently drawing up a sixth round of economic sanctions against Russia. More details are expected to emerge later this week.


European yields recovered from the early stages of the Russian-Ukrainian war as the expected growth slowdown didn’t deter the ECB from formally stepping up the normalization plans. Net asset purchases will end in June, with a first rate hike likely in July. Runaway inflation expectations suggest the ECB’s response will still be too little, too late. Next resistance stands at 1.06% (2015 top)-

The Fed started its tightening cycle and published an aggressive blueprint for the remainder of the year. 50 bps rate hikes at the next meetings can be taken for granted. The US yield curve extended its bear flattening trend. Quantitative tightening will start soon (>=$95bn/month). The psychologic 3% resistance holds for now.

EUR/USD remains stuck in a downward trend channel. Losing the previous YTD low at 1.0806 and the 2020 bottom at 1.0636, suggests a return to the 2017 low at 1.0341. ECB needs to step up its inflation response to give the single currency much needed backing. Russian war in Ukraine plays in the euro’s disadvantage as well.

The developing cost-of-living crisis seems to hit the UK economy first and the hardest. Weak economic data toughen the Bank of England’s dilemma in battling inflation with doubt starting to filter through in markets. EUR/GBP bounced off the 0.82/0.83 support zone. The YTD high at 0.8512 is first meaningful resistance.

Calendar & Table

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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).
These market recommendations are the result of qualitative analysis, incorporating room for past experiences and personal assessments. The views are based on current market circumstances and can change any moment. The most prominent input comes from publicly available data, financial news, economic and monetary policies and commonly used technical analysis.
The KBC Economics – Markets desk has used reasonable efforts to obtain this information from sources which it believes to be reliable but the contents of this document have been prepared without any substantive analysis being undertaken into these sources.
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