Friday, 4 November 2022
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•          The pound sterling underperformed peers yesterday. The Bank of England hiked by an expected 75 bps to 3%. More is coming but not as much as markets are discounting (4.5-4.75%), it said in unusually explicit wording. Combined with bleak economic forecasts, EUR/GBP rallied from 0.862 to 0.874. GBP/USD gave up support from the 50dMA (1.134) to finish at 1.116. Dollar strength was at least as much responsible for the move, enjoying a healthy bid still in the wake of Powell’s hawkish press conference. The trade-weighted index closed just south of 113. EUR/USD (0.975) lost the lower bound of the short-term upward sloping trend channel. Core bonds stayed under pressure with Bunds marginally underperforming USTs. ECB president Lagarde said that – while not the base scenario – a (mild) recession along would not be enough to tame inflation. These comments come after the ECB last week put more emphasis on growing recession risks, raising speculation for a dovish pivot soon. German yields rose more than 10 bps in the 2-10y segment. The European 2y (+8.6 bps) yield narrowly closed above 3% again. US yields rose between 4.1 bps (30y) and 9.4 bps (2y, new cycle high). A slightly below-consensus but solid October US services ISM doesn’t change the Fed narrative. A knee-jerk countermove on the daily market trends shortly after the release faded quickly. The post-BoE UK yield curve steepened with changes varying from +3.7 bps (2y) to +14.8 bps (30y). UK (money) markets are just not buying the BoE’s/Bailey’s story.
•          While European and US stocks closed lower yesterday, equities in Asia are closing the week more upbeat. Hong Kong/Chinese stocks go berserk (6-7%+) amid ongoing speculation of an exit from zero-Covid. News of US audit inspections in the region (necessary for keeping Chinese firms listed on US stock exchanges) having wrapped up early also boosted sentiment. China’s yuan rebounds from multiyear lows to USD/CNY 7.248. Some overall dollar weakness is at play too. EUR/USD advances to 0.978. US yields ease a few bps across the curve. Both current dollar and yield declines could soon reverse though. US October payrolls are due later today. An unexpected uptick in JOLT vacancies and the stronger-than-expected ADP job report earlier this week suggest that real labour market softness hasn’t arrived yet. Even if hiring were to slow compared to September, we think that a reading close enough to expectations (195k) will only reinforce Powell’s message on Wednesday. US yields at the shortest tenors already hit new cycle highs. Longer tenors could come closer today. EUR/USD support is located at 0.9633 (October low).

News Headlines

•          Following up on Tuesday’s 25 bps rate, the Reserve Bank of Australia published its quarterly “Statement on monetary policy” which sets out the RBA’s assessment of current economic conditions along with an outlook for inflation and growth. The central bank upgraded its forecast for trimmed mean inflation (favorite core gauge) for December 2022 from 6% in August to 6.5%. Core inflation will then fall to 3.75% in Dec2023 and remain above the 2%-3% inflation tolerance band by Dec2024 (3.25% from 3% in August). The forecasts assume a further increase in the policy rate to 3.5% by June next year (currently 2.85%) before settling back at 3% by end 2024. Australian growth is forecast at 3% for this year and 1.5% in both 2023 and 2024. The Aussie dollar is relatively stronger this morning, with AUD/USD rising from 0.63 to 0.6350, but remains weak in absolute terms. A positive Asian risk sentiment helps. AUD swap yields lose around 8 bps across the curve.
•          The US services ISM fell more than expected in October, from 56.7 to 54.4. It’s the weakest level since May 2020, even as the indicator remains far above the 50 boom/bust mark for the moment. Details paint a bleak demand side picture with a drop in business activity (55.7 from 59.1), new orders (56.6 from 60.6) and especially new export orders (47.1 from 65.1). Backlog of orders stabilized (52.5) with inventory levels shrinking at a slower pace (47.2 from 44.1). The employment component fell back below 50 (49.1 from 53). The prices paid component ticked up again to 70.7 from 68.7 pointing at still alleviated price pressure.


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. The neckline of the double top formation at 2.14% was tested but survived with ease.

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 tried to leave the strong downward trend channel since February but the move ended in tears. 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.

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. In addition, the BoE signaled les rate support than markets currently assume. First resistance is located around 0.89.

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). Read the full disclaimer.

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