Monday, 3 October 2022
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•          We had important inflation figures due on Friday. The price surge hit double digits in Europe while the Fed’s preferred gauge in the US (PCE (core) deflator) topped expectations too. But with the third quarter drawing to a close, core bond markets were in for some temporary relief after the recent aggressive repositioning. Yields in Germany eased between 4.5 (2y) and 7.3 bps (10y). UK Gilt yields, last week’s focal point, tanked 14-16.4 bps at the wings. American rates were the exception however, more than completely reversing declines to the tune of 10 bps across the curve thanks to a sharp rise in the final trading hours. Daily changes amounted eventually from +5.3 bps (30y) to +8.5 bps (2y) in a flattener. This late yield outburst also affected stock markets in the US. It pushed the S&P500 (-1.5%), which was already having a difficult day, over the edge. At 3585 a new YtD low was set. The USD was still strong but investors at the same time unwound some very popular short bets on JPY, EUR and GBP. EUR/USD closed only marginally lower at 0.98. GBP/USD grinding higher to 1.117. EUR/GBP erased almost all of the gains that followed UK Chancellor Kwarteng’s fiscal overhaul announcement two weeks ago. The pair dipped below 0.88.

•          Chinese markets this week are closed for Golden Week. It makes the Asian session a rather dull one this morning. You’ll find the two most important events in the headline section below. Commodity currencies (AUD, NZD, CAD) benefit this morning from the OPEC rumours. The euro and the yen aren’t in great shape but lucky for them, the USD isn’t either. Sterling pares losses following a report that the UK may reverse the planned scrapping of the top tax rate. Core bonds either extend their recovery (Bund) or make another attempt (Treasuries) to do so. Stocks enter the final quarter on weak footing with losses up to 1.8% (Hong Kong). European futures at the open fell 2.4% (in thin liquidity) but in the meantime pared losses to 1.4%.

•          Today’s economic calendar contains the US manufacturing ISM (expected to ease from 52.8 to 52.1). Other important economic input follows on Wednesday (ADP job report, non-manufacturing ISM) and Friday (September payrolls). For the time being, we stick to our view of temporary consolidation on core bond markets and the US dollar. For the US10y and European 10y swap/German 10y yield, downside support kicks in around 3.5% and 2.72%/1.93% (June highs). The first reference in the trade-weighted dollar (DXY) is situated around 110.8, followed by 109.29.

New Headlines

•          According to sources, OPEC+ at its meeting in Vienna on Wednesday is considering an output reduction of 1 mln barrels per day (or more). After touching a peak in the wake of the Russian invasion in Ukraine, oil prices have dropped sharply from levels of >$120 p/b for Brent to currently near $87 p/b as investor fears for a global recession easing demand, higher yields and a strong dollar put prices under pressure. A cut of 1 mln barrels p/d would be the biggest reduction since the start of the pandemic in 2020. If so, the move could raise tensions between the US and Saudi Arabia as the US and other consumers asked the country raise production to give breathing space to the global economy and as lower prices would reduce Russia’s oil revenues.

 •         The quarterly Tankan Survey of the Bank of Japan showed a rather unconvincing picture. The manufacturing index for large companies unexpectedly dropped from 9 to 8. The outlook amongst large manufacturers also declined to 9 from 10. The assessment of large non-manufacturers increased slightly from 13 to 14 but the outlook also deteriorated. On the other hand, the Japanese industry expects capex to rise more than expected at 21.3% in the fiscal year 2022. Large manufacturers also indicated to take into account an average rate of USD/JPY of 122.73 for this fiscal year. This much stronger than current rate near 145. With respect to currency weakness, Japanese Finance Minister Suzuki this morning again warned Japan stands ready to take decisive action to prevent excessive moves in the FX markets.


The ECB ended net asset purchases and lifted rates with a 50 bps inaugural hike and a 75 bps follow-up move. A similar-sized move in October is in the cards. Germany’s 10-yr yield broke out of the corrective downward trend channel since mid-June and took out the YTD high at 1.93%. In case of a sustained break, 2.56% serves as the next reference. Short-term though we expect some consolidation to kick in.

After three 75 bps rate hikes, the Fed moves into (modestly) restrictive territory, but more rate hikes are needed to slow aggregate demand. After a sharp correction this summer, the 10y breaks beyond the 3.50% barrier. With the Fed signalling a prolonged period of restrictive policy, next target at 3.76% was hit quickly thereafter. 4.0% was tested but survives for the time being.

EUR/USD is in a strong downward trend channel since February. A hawkish ECB did no more than buying the euro some time. The dollar remains the main beneficiary of rising US (real) yields combined with a persistent risk-off context. Geopolitical tensions and the risk of a recession don’t help the euro either. The break below 0.9864 opened the way to the psychological 0.95 mark

The Bank of England hiked by 50 bps in September but risks falling behind the curve with lavish fiscal support. Markets aggressively repositioned in response. The pound is unable to profit from this increased rate support though with attention going to yawning deficits and rising risk premia. EUR/GBP skyrocketed above 0.90. Sterling’s faith is sealed if the Truss administration does not pivot on the overambitious fiscal plans.

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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