Monday, 5 December 2022
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•          The reaction to Friday’s strong payrolls report is telling. Net job growth beat consensus at 263k with average hourly earnings growth accelerating to 0.6% M/M and 5.1% Y/Y. The unemployment rate stabilized at 3.7%, though a lower participation rate helped. The payrolls confirm the still red hot US labour market and seemed to serve as the perfect excuse to stop current corrections on bond/FX/stock markets going into the final Fed policy meeting of the year. In a first reaction, this all played out: the dollar firmed, the US yield curve turned more inverse with Treasuries falling and main US indices opening almost 2% lower. Strange enough, these Pavlov-moves didn’t gain traction. On the contrary, by the end of US dealings, most of them were almost completely erased. It all suggests strong market comfort regarding a Fed policy moderation, especially since last Wednesday’s speech by FOMC Chair Powell. This tide probably won’t change until that December 14 Fed meeting, with the only big data point remaining being next Tuesday’s November CPI readings. While the Fed will shrink the magnitude of its rate hike from 75 bps to 50 bps, markets remain very complacent about Fed speak about a higher peak policy rate peak and vowing against rate cuts in 2023. Perhaps the new FOMC dot plot might open some eyes.
•          US yield changes eventually ranged between +4.2 bps (2-yr) and -5.1 bps (30-yr). The US 10-yr yield is currently testing the June top at 3.5% with 50% retracement on the Aug/Oct move higher luring at 3.42%. Changes on the German curve varied between +8.6 bps (2-yr) and -2.9 bps (30-yr) by the European closing bell, but these don’t (completely) take into account the US market-reversal. The German 10-yr yield is at risk of losing 1.77%/1.82% support at the open this morning (October low/38% retracement on Aug/Oct move higher). The trade-weighted dollar spiked from 104.50 to 105.50 after payrolls, before returning this gain and sliding towards 104 this morning in a positive Asian risk climate. EUR/USD went from 1.0540 towards 1.0430 and currently changes hands near 1.0575. Next technical marks are 1.0747 (62% retracement on this year’s slide) and 1.0806 (March low). Main US stock markets closed unchanged.
•          This morning’s risk vibe is related to looser Chinese Covid-rules with Shanghai for example scrapping PCF testing requirements to enter outdoor public venues. Measures will continue to be optimized and adjusted. Local stock markets gain up to 4% for Hong Kong while the Chinese yuan surges below USD/CNY 7 for the first time since September as CNY strength meets USD weakness. Today’s eco calendar contains US non-manufacturing ISM, but we don’t think it will be of any relevance.

News Headlines

•          S&P changed the outlook on the French AA rating from stable to negative as it sees rising risks to the country’s public finances and the resulting reduction in fiscal space. France already has a large general government debt which faces implementation risk associated with the country’s structural reform agenda, an economic slowdown and the ECB’s monetary tightening. S&P could lower the rating if general government debt to GDP doesn’t decline over the 2023-25 period. It reduced the 2023 growth outlook to 0.2% from 1.7% while 2023 the budget deficit is expected at 5.4% of GDP. With the deficit expected to average 4.9% in 2023-25 period, government debt is expected to rise to 112% of GDP. At the same time, Moody’s kept the outlook on its French Aa2 rating unchanged at stable as the agency sees the risks to France’s credit profile as balanced. It assesses France as a wealthy and diversified economy. The country has strong debt affordability in spite of an elevated debt level, according to Moody’s.
•          The Confederation of British Industry (CBI) substantially downgraded its forecast of the UK economy. CBI now expects the economy to contract 0.4% next year due to high inflation and as companies scale back investments. CBI also doesn’t expect activity (GDP) to return to a pre-Covid level before mid-2024. Unemployment is expected to rise to 5.0% end 2023/early 2024. Inflation is only expected to ease slowly. Inflation printed at 11.1% in October this year. CBI expects average price growth of 6.7% next year and 2.9% in 2024. Business investment at the end of 2024 is still seen 9% below its pre-pandemic level and output per worker 2% lower.


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 1.95% calls for a return towards the 1.82%/1.77% support zone.

The Fed policy rate entered restrictive territory, but the central bank’s job isn’t done yet. The policy rate is expected to peak above 5% early next year and remain above a neutral 2.5% over the policy horizon. A below consensus CPI print strengthened the call to slow down the pace of the tightening cycle, triggering a strong correction. The move below the neckline of the double top formation at 3.91% suggests more downside potential towards the June top at 3.5%.

USD for the largest part of this year profited from rising US (real) yields in a persistent risk-off context. EUR/USD left the strong downward trend channel since February as the current correction on bond markets caused turnarounds on FX and equity markets as well. Key resistance at 1.0341/50/68 gave away. The next zone is situated at 1.0747/1.0806.

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. The Bank of England stepped up its tightening with a 75 bps rate hike, but warned simultaneously that UK money market expectations about peak cycle are way too aggressive. EUR/GBP is testing key support at 0.8559/67.

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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