Thursday, 3 March 2022
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•          There are still few signs that the conflict in Ukraine might end soon. New talks between Ukraine and Russia are planned for today, but the outcome is unpredictable. Even so, markets yesterday left the risk-off modus. US indices rebounded 1.50% +. The EuroStoxx 50 gained 1.42%. Energy stocks took the lead. Even so, economic headwinds continue to build. Commodity prices of the likes of wheat, corn but also several metals and energy components rose sharply, indicating further upward pressure to already elevated inflation. Brent this morning even touched the $118 b/p level! Inflation erodes consumers’ disposable income as illustrated by the EMU February CPI jumping to a record high 5.8% Y/Y (core inflation from 2.3% to 2.7%). With risk for inflation still moving higher, it won’t be easy for the ECB to defend a gradual policy normalization. At least for the Fed, the geopolitical developments are no reason to backtrack on the start/the pace of normalization. In his testimony before the House, Fed’s Powell ‘guided’ a 25 bps rate hike at the March meeting. However, a bigger step is possible if inflation data warrant such a move. Interest rates in the US and Europe were already on an upward trajectory since the start of trading in Europe and the move accelerated slightly further during/after Powell’s testimony. US yields jumped between 17 bps (2-y) and 14.25 bps (30-y) higher. The rise was mainly due to a higher real yield (+11.6bps) but inflation expectations are also revisiting the cycle top. German yields also rose between 15.3 bps (5-y) and 6.4 bps (30-y). Despite the risk-on, intra-EMU spreads (except for Greece) halted recent narrowing move with the 10-y spread of Italy versus Germany rising 5 bps. On FX markets, the dollar (DXY close 97.40) held recent gains, but for now with no further extension. EUR/USD closed at 1.112, off intraday lows. Even so the picture looks fragile even as the market again discounts a 25 bps ECB rate hike by year-end. In CE currencies (CZK and HUF) remain in the defensive (close at respectively EUR/CZK 25.56 and EUR/HUF 378.15). The zloty closed little changed after the NBP signaled PLN buying for the second day in a row and as the government said it will sell its FX directly in the market (EUR/PLN close at 4.74).

•          This morning Asian equities mostly show modest gains. Treasuries regain modest ground after yesterday’s setback. The dollar (DXY 97.46) is gaining a few ticks. Later today, eco data (US jobless claims, services ISM, EMU PPI) probably will remain of second tier importance. We keep a close high at the global (equity) market reaction to the astonishing rally of oil and other commodities. Core interest rates yesterday rebounded off key technical levels (US 10-j 1.70%, 10-y Germany -0.10% area), putting a solid floor. However further gains might take time as long as global uncertainty persists. EUR/USD is still fighting an uphill battle. Powell reaffirmed the Fed’s intentions. The ECB still has to do so. This keeps the pair vulnerable for return action to the 1.10 area.

News Headlines

•          The Bank of Canada as expected raised policy rates by 25 bps for the first time in the post-pandemic recovery. The main reference rate stands at 0.50% and will need to rise further. The BoC will also consider when to end reinvestment of its bond holdings. Policy normalization follows stronger-than-expected Q4-growht and a more solid Q1 than projected. Omicron caused a setback in the labour market recovery though hasn’t materially hurt household spending. Inflation at 5.1% remains well above target with price increases having become more pervasive. The invasion of Ukraine puts further upward pressure on energy and food prices and may weigh on global growth. The loonie strengthened vs the dollar to USD/CAD 1.2631. EUR/CAD closed at the lowest level since early 2017 at 1.4043.

•          Several rating agencies have cut Russia’s credit rating to junk. Fitch lowered its rating six levels from BBB to B while Moody’s downgraded from Baa3 to B3. Fitch cited elevated domestic and geopolitical risks and the potential for further sanctions and specifically pointed to those taken against Russia’s central bank. It poses huge risks to Russia’s macro-financial stability and represent a huge shock to credit fundamentals. Moody’s mentioned significant concerns around Russia’s willingness to service its obligations. The S&P cut Russia’s rating last week from BB+ to BBB- and warned for further downgrades.


Long term (real) EU bond yields surged after the ECB hinted it may stop net bond buying sooner than previously expected. The German 10-y yield jumped to the 0.33 area. However, geopolitics and the fear for higher energy prices to cause a material slowdown, this week sent the 10-y back in negative territory. -0.11% now comes again into play as a first key support.

The Fed’s hawkish policy turn caused a surge in real yields. The January CPI release even triggered a first brief return above 2%. Fed talk since the escalation in the geopolitical narrative suggest policy normalization won’t be delayed. However, safe haven flows caused a return to the 1.70% previous support. For now the supports survives.

The ECB in February dramatically changed its views on temporary inflation. Net bond buying was poised to end sooner (in Q3?), allowing for a first rate hike later this year (Q4). EUR/USD left the lows behind. However, the conflict in Ukraine made investors doubt on the pace of ECB policy normalization. Short-term momentum favors the dollar again. A sustained break of 1.1121/06 would further weaken the picture.

The BoE hiked its policy rate to 0.5% in February with the biggest possible minority even voting for a 50 bps increase. Further tightening is in the pipeline. The pair tested 0.8282 support but rebounded quickly.

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).
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