Tuesday, 4 October 2022
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•          The US manufacturing ISM surprised to the downside yesterday, easing from 52.8 to 50.9. The lowest reading since May 2020 followed a (deeper) drop in employment and new (export) orders into contraction territory. Backlogs fell sharply from 53 to 50.9. It reinforced the ongoing core bond yield correction earlier on the day, especially in the US. American rates tumbled 20 bps, give or take, at the belly of the curve (5-10y) on the account of real yields. The short end eased 16.5 bps as markets eased bets on Fed policy tightening even as most Fed governors (e.g. Williams) continue to argue for the opposite. German yields shed between 13.9 bps (2y) to >19 bps (5y, 10y). Gilt yields in the UK tanked in similar fashion with the exception of the very long end (30y +6.3 bps) after Chancellor Kwarteng cancelled the planned scrapping of the top tax rate. He later bit the dust again at the Conservative Party Conference. He announced that he’ll present his medium-term fiscal plan – containing a five year debt-cutting trajectory aimed to reassure markets – “shortly”. The Financial Times citing sources reported this could be as soon as this month instead of the original November 23. Equity markets rallied yesterday. European stocks undid losses of 2.5% to finish 0.7% higher. Wall Street rose between 2.3 and 2.7%. The dollar was under pressure. DXY closed below 112. EUR/USD, despite an unconvincing euro, rebounded intraday from 0.975 to 0.983. EUR/GBP stumbled below 0.8721 support to 0.868. Commodity currencies profited from an imminent OPEC+ output cut.

•          Asian-Pacific trading is all about the RBA decision (see below). It simply adds to the march higher in core bonds which is supporting stock markets. Gains go as high as 3.3% in Japan. The Aussie dollar obviously underperforms on FX markets. The dollar together with the euro strengthens a tad. USD/JPY is not leaving the 145 station as markets continue to challenge the Japanese MoF. Sterling holds on to yesterday’s gains.

•          With an empty economic calendar ahead for the day we think the current yield correction could go on. Things were priced to perfection and there’s scope for yields to consolidate further. In Germany, the 10y hit a first technical support at 1.92% yesterday. The next reference stands at 1.77%. For the European 10y swap and the US10y sovereign yield we keep a close eye at 2.72% and the 3.46%/3.50% area. The dollar is in for a temporary break as well, assuming Treasury outperformance combined with a more constructive setting for equities (but watch out for sucker rally’s). EUR/USD 0.99(5) is the first important technical reference. UK politics these days are worth following up too. Some cabinet ministers say Truss’s economic revolution plan may be over already. To be continued.

News Headlines

•          The Reserve bank of Australia surprised as it raised its policy rate by only 25 bps to 2.60%, while a 50 bps hike was largely expected. The RBA reiterates it commitment to returning inflation to the 2-3% target and further interest rate hikes are likely. However, the RBA is assessing the outlook on inflation and growth as rates have been increased substantially in a short period of time. Inflation is still too high and might further increase in the months ahead but is expected to ease next year. The RBA sees inflation a little above 4% next year and around 3% over 2024. The RBA mentions the global outlook as a source of uncertainty. It is also uncertain how Australian households will respond to tighter financial conditions including the effect on mortgage payments, with consumer confidence and housing prices declining. Further rate increases will be data dependent. Australian government bond yields currently are declining between 34 bps (3-y) and 20bps (10-y). The Aussie dollar initially dropped from AUD/USD 0.6510 to 0.6451, but reversed part of the initial decline (currently 0.648).

 •         The BoE yesterday only bought £22mln of Gilts under the program it initiated last week to address instability in the bond market. The maximum amount of daily purchases was set at £5bln. Over the four days since the start of the program, the BoE bought a communicative £3.66 bln compared to the potential maximum of £20 bln. The small amount of buying might be an indication that the BoE sees market strain easing. The Bank probably also avoids too much interference of current buying with its overall policy stance. The program is scheduled to last till 14 October.


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 set a new YtD high at 2.35%. 2.56% serves as the next reference over the medium term. Short-term, we expect a period of consolidation after the recent sharp repositioning. 1.92% support (previous cycle high) is being tested.

After three 75 bps rate hikes, the Fed moves into (modestly) restrictive territory. But further tightening is necessary. The 10y surpassed 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 survived. It introduced technical return action that in first instance could go to 3.5%.

EUR/USD is in a strong downward trend channel since February. After testing the 0.95 support area, the pair rebounded though we expect the channel bounds to hold. A hawkish ECB did no more than buy the euro some time. The dollar remains the main beneficiary of rising US (real) yields combined with a persistent risk-off context. Geopolitics and recessionary risks weigh particularly on the euro too.

The Bank of England risks falling behind the curve with lavish fiscal support announced by the government. Markets aggressively repositioned in response. The pound is unable to profit 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 KBCEconomics.be 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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