Thursday, 6 July 2023
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•          Core bonds fell yesterday. Underperformance of US Treasuries vs Bunds triggered a technical break in the US 10y yield. The reference added 7.6 bps to 3.93%, surpassing 3.90% (December 2022 correction high) with 3.92% (61.8% recovery on the October 2022 – April 2023 correction lower) following soon. The front-end of the curve added 1-6.1 bps with the 2-y yield gently closing in on the symbolic 5% barrier. Hitting that barrier also officially turns the page on the mid-March regional banking tremors. US yields had a rocky start in European morning dealings with the Chinese PMI setback still lingering and as the ECB’s survey showed consumer (1-y) inflation expectations easing further. They lifted off in the early afternoon and gained further traction as the US joined for its first full trading day after a long weekend. The FOMC meeting minutes published late in the US session supported yields but didn’t really add momentum. The key takeaway is that the decision to pause in June wasn’t as unanimous as chair Powell made it sound. Those favouring to hike again simply deemed it “acceptable” to sit one out in June. Another interesting feature was that Fed staff saw the possibility of the economy avoiding a recession as almost as likely as the mild-recession baseline. German yields rose between 1-4.2 bps with the long end underperforming. Gilt yields in the UK also steamed ahead. The 2-y yield (+5.8 bps) hit a new cycle high while the 10-y tenor (+7.8 bps) closed at the highest level since the Sep-Oct 2022 gilt crash. Bets for the BoE hiking rates to 6.5% are rising to about 40%. Equities were under pressure as real yields drove yesterday’s move. The EuroStoxx50 eased 0.92%, Wall Street ended 0.18-0.38% lower. The dollar profited. EUR/USD retreated from 1.0879 to 1.0854, DXY rose to 103.37. Sterling wiped out earlier losses to close stronger for the day. EUR/GBP finished at 0.8544.
•          Yields in the US add another few bps in Asian dealings this morning but we look at today’s and tomorrow’s data releases for yesterday’s technical break in US yields to be confirmed. The calendar today includes the US services ISM. The indicator unexpectedly fell to 50.3 in April. We expect the sector to remain above the neutral 50 barrier in May though (consensus 51.2). A slew of labour market data comes ahead of the official June payrolls report tomorrow. Markets brace themselves for the weekly jobless claims (245k expected), JOLTS (9885k) and ADP employment (245k). Releases more or less in line with analyst estimates could sustain the recent core bond yield increase. Cracking tough resistance in the US 10-y yield around 4.01%/4.08% may need payroll approval though. Potential negative spillovers to stock markets, which are already under pressure in Asian dealings, may further support the USD with first resistance in EUR/USD located at around 1.08.

News Headlines

•          The Hungarian forint suffered a significant setback yesterday with EUR/HUF closing at 381.50 from an open at 375. From a technical point of view, the pair closed above the upper end of the sideways trading channel in place since April (EUR/HUF 368-380). The Polish zloty and Czech koruna were in the defensive as well. One driver they have in common is the divergence between central bank policy with the core (EMU/US) still on a hiking path (& real rates rising) and regional markets placing the emphasis on rate cuts as a next step. On a country-level, there is some nervousness in the run-up to Friday’s approval of the 2024 budget. The state’s fiscal council said that next year’s plan was “stretched” and will likely need an overhaul. Concerns about the deteriorating fiscal position and the ongoing battle with the EU over frozen grants and loans (€30bn) in the corruption and rule of law quarrel are becoming top of mind for investors.

•          The quarterly survey from the British Chamber of Commerce revealed that 45% of UK companies expects to lift prices over the next three months. That’s down from 55% in the previous survey and the first <50% figure since 2021. Wage pressures are now the main inflationary force for businesses, the BCC said, rather than energy or material costs. Later today, the Bank of England’s decision maker panel survey for June will be released and give an update on firms’ inflation expectations. Earlier this week, Citi/YouGov consumer survey found 1y ahead consumer inflation expectations rising from 4.7% to 5%.


The ECB adopted a more gradual approach by slowing its tightening pace from 50 to 25 bps in May. It stated that in the base scenario rates will be brought to sufficiently restrictive levels (i.e. more hikes to follow) and will stay there for as long as necessary. Combined with APP reinvestments fully stopping from 2023H2 on, we expect a solid bottom below European/German yields.

The Fed skipped a rate rise in June but the dot plot suggests two more to come this year with a first move due in July. A pause allows for more evidence on the pass-through of the previous tightening and on the regional bank implosion. The hikes pencilled in signal readiness to act against still elevated inflation and an unexpectedly strong labour market and economy. Yields rebounded and are testing critical resistance ahead of the March top.

The Fed’s awkward pause, even as it is followed by more hikes, marks a stark contrast with the ECB’s ongoing decisiveness. EUR/USD overcame several ST resistance levels with the pair having attacked 1.0942 (50% recovery on 2021-2022 decline). However, the 1.10 area proved to be tough resistance short term. Some short-term consolidation in a narrow 1.08/1.10 range may be at hand.

The BoE’s conditional rate hike approach comes back to haunt them after April and May CPI delivered a nasty surprise and the labour market remained red hot. Money markets expect several more rate hikes, pushing sterling to a new YtD high. Short-term momentum in sterling improved, but we stay cautious MLT. Divergency within the BoE about the way forward still might change sentiment further out.

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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