Friday, 6 May 2022
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•          On Wednesday the Fed hiked its policy rate 50 bps and signaled more such steps to come. At the same time, chair Powell said that 75 bps steps were not on the table. This message at that time provided comfort with both bonds and equities sharply rebounding. However, 24 hours later investors came to a completely different conclusion. US Treasuries tumbled sharply in a steepening move with yields rising from 6.1 bps (2-y) to 9.7/10.2 bps for 5/10y sector. At first sight, the moves looked a sign of doubt on the Fed’s commitment as it rejected 75 bps hikes. However, this was at odds with a remarkable rise in US real yields (10y +12.1 bps to  0.175%). Whatever, this jump in (real) yields and lingering doubts on the economy potentially moving to a stagflationary scenario triggered a sharp equity sell-off. US indices tumbled between 3.12% (Dow) and 4.99% (Nasdaq). Losses in Europe were more modest (EuroStoxx -0.75%). European yields initially corrected lower. ECB’s Lane admitted that inflation is unlikely to revert to a below-target trend, but still advocated a gradual approach. In the meantime other MPC members continued the debate on a July rate hike. German yields later joined the rise in the US closing between 1.4% (2-y) and 9.1 bps (30-y) higher. After the close of the European markets, Austrian ECB member Holzmann formally opened the debate on a JUNE ECB rate hike and suggested such a move was a real option. For now, it’s the idea of only one MPC member, but it needs close monitoring. Several other central banks also immediately raised rates when asset purchases were halted. On FX markets, the dollar reversed most of Wednesday’s post-Fed setback. The DXY-index again tested the cycle peak just below 104, but no break occurred. Similar picture for USD/JPY with a close at 130.20. EUR/USD dropped to the 1.05 area, but with a close at 1.0542 also avoided a test of the 1.0472 low. The dollar is holding strong, but given the extreme risk-off and the sharp rise in US (real) yields gains could have been even bigger. The almost impossible task for a central bank to successfully manage a stagflationary environment yesterday appeared at the BoE meeting. With inflation probably still at 10%+ at the end of the year, but growth expected to shrink at that time, the BoE still reached consensus on a 25 bps rate hike. Three members voted for a 50 bps step. At the same time, other members didn’t want to flag further steps. UK yields tumbled (2-y -9.1bps). Sterling fell off a cliff. Cable tumbled from the 1.2575 area to close at 1.2362. EUR/GBP closed north of the 0.8512 resistance (0.8527).

•          Asian equities also endure substantial losses of 2/3% this morning with Japan the exception (+0.60%) after the WS sell-off. US yields stay upwardly oriented going into the US payrolls report. For once, we doubt the report will have a determining impact on current market dynamics. A poor report, might rekindle stagflationary risk. A strong report will only reinforce the bond market sell-off. A risk-off and higher yields in theory should support the dollar. EUR/USD 1.0472 is still within reach but the US currency over the previous days failed to break some key resistance levels. In Europe, we look out whether other ECB members will join the ‘Holzmann-debate’ on a potential June rate hike. If so, it won’t pass unnoticed on EMU yields markets and maybe it can even take some pressure off the euro. After yesterday’s break above 0.8512, the technical picture for sterling deteriorated. EUR/GBP 0.8658/67 is next target on the charts.

News Headlines

•          The National Bank of Poland raised its policy rate yesterday by 75 bps, from 4.5% to 5.25%, the highest level since 2008. NBP governor Glapinski holds a press conference this afternoon. In its policy statement, the central bank vowed to take all necessary actions in order to ensure macroeconomic and financial stability, including above all to reduce the risk of inflation remaining elevated. Polish inflation surged to 12.3% Y/Y in April. In the coming quarters, inflation will remain markedly elevated. The Polish economy extended its strong run from Q4 2021 into Q1 2022. Favourable economic conditions remain in place, though a gradual slowdown might be expected. The Polish zloty lost ground after the release with EUR/PLN rising from 4.65 towards 4.70. The Polish zloty swap bucked the global trend by bull steepening yesterday. Daily yield changes ranged between -13 bps (2-yr) and +1.5 bps (30-yr). Apparently, some expected a stronger signal from the NBP in its inflation fight.


European yields recovered from the early stages of the Russian-Ukrainian war as the expected growth slowdown didn’t deter the ECB from formally stepping up the normalization plans. Net asset purchases will end in June, with a first rate hike likely in July (or even June?!). Runaway inflation expectations suggest the ECB’s response will still be too little, too late. Next resistance stands at 1.06% (2015 top).

The Fed started its tightening cycle and published an aggressive blueprint for the remainder of the year. 50 bps rate hikes at the next meetings can be taken for granted. The US yield curve extended its bear flattening trend. Quantitative tightening will start in June. The psychologic 3% resistance is now at risk of being left behind.

EUR/USD remains stuck in a downward trend channel. Losing the previous YTD low at 1.0806 and the 2020 bottom at 1.0636, suggests a return to the 2017 low at 1.0341. ECB needs to step up its inflation response to give the single currency much needed backing. Russian war in Ukraine plays in the euro’s disadvantage as well.

The developing cost-of-living crisis seems to hit the UK economy first and the hardest. Weak economic data toughen the Bank of England’s dilemma in battling inflation with doubt starting to filter through in markets. Open division within the BoE and the limited room for further tightening pushed EUR/GBP above the 0.8512 level. A sustained break would be a bad omen for sterling

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).
These market recommendations are the result of qualitative analysis, incorporating room for past experiences and personal assessments. The views are based on current market circumstances and can change any moment. The most prominent input comes from publicly available data, financial news, economic and monetary policies and commonly used technical analysis.
The KBC Economics – Markets desk has used reasonable efforts to obtain this information from sources which it believes to be reliable but the contents of this document have been prepared without any substantive analysis being undertaken into these sources.
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