Thursday, 3 November 2022
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•          The Fed yesterday raised rates by the expected 75 bps to 3.75-4%. That brings the policy rate further in restrictive territory, meaning that it actively dampens the economy and over time should cool inflation. Further hikes are coming but the statement hinted that this would most likely be at a slower pace (50 bps). A wave of optimism flushed over markets. Equities jumped, the dollar and US bond yields tanked. Enter Powell. The Fed chair confirmed that future hikes could be of a smaller magnitude but maybe not straight away. It may come at the December meeting or the one after that. He also said that incoming data since the last meeting suggests that the terminal rate will be higher than the 4.5-4.75% penciled in in the September dots and that a pause is very premature to think about. We now assume the peak to be well above 5%. Powell’s task was to announce a slowdown without suggesting that it is at the beginning of the end, the hoped-for pivot. The pre-press conference market reaction shows that this would have triggered a furious risk-on rally otherwise, undoing part of the previously delivered tightening. It was a job well done with a straightforward market reaction. Wall Street slipped 1.55% (DJI) to 3.36% (Nasdaq). The US curve became more inverted with a 7.5 bps increase at the front and 4.9 bps (30y) at the long end. The dollar surged. EUR/USD dropped from an intraday high of 0.997 to 0.982. The trade-weighted index erased previous gains and USD/JPY closed just below 148 after having traded as low as 145.7.
•          Yesterday’s US market moves extend into Asian dealings this morning. US Treasury futures dip (Japanese cash markets are closed for Culture day) and catch German Bunds in a slipstream. Equities are under pressure, most notably in China/Hong Kong (-3%). The country’s NHC yesterday said it adheres to the zero-Covid principle. Earlier, rumours of a potential exit from this economically devastating strategy lingered, boosting market sentiment. A weaker-than-expected Caixin services PMI dipping further in contraction territory (48.4) weighs too (see headline below). The US dollar more or less stabilizes around yesterday’s closing levels.
•          Today is filled with other central bank meetings, from the Czech Republic (status quo at 7% expected) over Norway (+50 bps to 2.75% expected) to the Bank of England. The latter is seen raising rates by 75 bps to 3%. That would mark a step-up from the 50 bps in previous meetings but is way less than the 150 bps temporarily discounted shortly after Kwarteng’s unfunded minibudget. UK Chancellor Hunt in the meantime tore the budget apart and shifted to fiscal conservatism. It’s not yet clear how this will look in practice since the medium-term fiscal statement has been postponed to November 17. It means the BoE is having its meeting without that input, taking some shine of the central bank’s new forecasts. That makes it tricky to assess the implications for sterling too in a daily perspective. EUR/GBP 0.8559 serves as a first support with 0.8721 marking the first reference to the upside. Longer-term, we stick to our cautious sterling bias.

News Headlines

•          Chinese Caixin Services PMI for October deteriorated more than expected, dropping from 49.3 to 48.4 further into contraction territory. China’s zero Covid-strategy continued to curb demand and disrupted business activity. On a small bright note, expectations for future activities picked up slightly. The composite PMI more or less stabilized at 48.3 (from 48.5) after Tuesday’s small upward surprise in the manufacturing gauge (49.2 from 48.1 vs 48.5 expected). In other China-related news, the National Health Commission said that official must be committed to Zero-Covid and the work of controlling the virus, striking down rumours that China would relax its overall strategy. The Chinese an remains weak at USD/CNY 7.30.


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 2.14% calls for a return towards the 1.82%/1.77%/1.74% support zone.

The Fed policy rate was lifted by 75 bps to 3.75-4% in November and the central bank’s job isn’t done yet. But future hikes could be smaller from December or February on, depending on the data. Either way, the terminal rate is seen higher than projected back in September (4.5-4.75% early next year). Hikes are complemented by QT ($95bn/month). Market repositioning could allow for some further inversion of the curve.

EUR/USD is trying to leave the strong downward trend channel since February. USD for the largest part of this year profited from rising US (real) yields in a persistent risk-off context. Geopolitical and European recessionary risks kept EUR in the defensive even as the ECB finally embraced on a tightening cycle. Corrections on bond markets weighs on USD. KEY resistance stands at 1.0350.

The UK government had to backtrack on its lavish fiscal spending plans which sent sterling initially tumbling towards the EUR/GBP 0.90+ area. Yawning twin deficits and rising risk premia will continue to weigh on the UK currency longer term even as markets think that the BoE will have to step up its tightening cycle. Short term support stands at EUR/GBP 0.8567.

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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