Tuesday, 7 February 2023
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•          Core bonds suffered a massive hangover on Monday. Ridiculously strong US data last Friday caused a further repricing in favour of central bank guidance, particularly in the US where money markets now discount a 5-5.25% terminal rate. The move ran its course uninterrupted by other data releases and with the backing from the likes of Fed’s Bostic. His base case was for rates to reach 5-5.25% but he added that January’s strong jobs report raised the possibility of even higher rates if the stronger-than-expected economy persists. US yield changes varied between 6 bps (30y) to 18+ bps (2y, 5y). The 2y yield tested 4.50% and the 10y yield (close at 3.64%) extended gains well beyond the 3.50% resistance-now-turned-support. European yields were pulled higher in the slipstream with swap yields adding 8.2 bps to 11.7 bps, the belly of the curve underperforming. UK gilts underperformed. Yields in the area shot up 18.9-20.7 bps in the 2y-10y bucket. Bank of England’s Mann adopted ECB language and vowed to stay the (tightening) course. She said that consequences of doing too little still far outweigh the alternative. Both the dollar and sterling outperformed in FX space with the former enjoying an additional boost from a grim risk/equity sentiment affected by geopolitics too. The trade-weighted DXY jumped beyond the March 2020 pandemic high to close at 103.46. EUR/USD retreated from 1.0805 to the low 1.07 area. EUR/GBP eased from an intraday high around 0.896 to 0.892 while sterling did lose out against the USD (GBP/USD grinding towards the 1.20 support zone).

•          The Reserve Bank of Australia added to the hawkish central bank atmosphere by raising rates to the highest in 10 years and flagging more to come (see below). And in Japan nominal wages jumped by the most since 1997 (4.8%). While partially supported by bonus increases, it may reignite speculation that the Bank of Japan could further plan its exit from ultra-easy monetary policy. After a sharp two-day decline, core bonds are nonetheless given a breather in Asian dealings. US cash yields lose up to 5 bps at the front. The Australian dollar outperforms G10 peers. The US counterpart loses a few ticks. Japan’s yen appreciates a tad. Stocks in the Asian region trade mixed.

•          Today’s economic calendar is loaded with central bank speeches from the ECB over the BoE to the Fed. We doubt any of them liked the easing in financial conditions after all of them met last week. This is an opportunity for policymakers to formally push back. Among them: Fed chair Powell. His dovish accents and overly balanced tone during last week’s FOMC meeting triggered an outsized market reaction. That likely unnerved some within the committee (eg. Bostic’s speech). In combination with the strong batch of US eco data last week, we expect Powell to bring a much more unequivocal message this time around. Core bonds and equities could remain under selling pressure. The US dollar stands to benefit from this.

News Headlines

•          The Reserve Bank of Australia (RBA) raised its policy rate as expected this morning by 25 bps to 3.35%. It’s the ninth consecutive rate hike since the normalisation/tightening cycle started in May last year. The RBA sounded more hawkish than in December in its closing paragraph: it now expects that further increases in interest rates will be needed over the months ahead to ensure that inflation returns to target and that this period of high inflation is only temporary. In December, the RBA said that it was not on a pre-set course when it comes to additional tightening. Another addition was a reference that if high inflation were to become entrenched in people’s expectations, it would be very costly to reduce later. This is something commonly flagged by central bankers: it’s better to take the risk of over- than underdoing. Finally, the RBA mentioned stronger than expected core Australian inflation numbers in an otherwise more “balanced” economic assessment (high inflation vs weak growth). The hawkish plots in the statement help the Aussie dollar against a strong greenback this morning with AUD/USD rising from 0.6880 to 0.6940. Last week’s USD surge pulled the pair away from 0.7137 resistance. AUD swap yields add up to 13 bps for the 2-yr with money markets lifting their peak policy rate expectations close to 4%.

•          Total UK retail sales rose by 4.2% Y/Y in January, around half the pace in December. High inflation hides an underlying drop in retail volumes. British Retail Consortium (responsible for the data) CEO Dickinson said “as Christmas cheer subsided, retailers felt the January blues. With ongoing cost pressures and labor shortages, increases in sales don’t convert into profits or cash”.


The ECB flagged another 50 bps rate hike in March, accompanied by QT. This clear prioritization to combat inflation initially failed to push the 10-y Bund towards the cycle top just north of 2.50%. A strong batch of (US) eco data later served as a global wake-up call. Support at 1.96% survived with a follow-up countermove. We stick to our view that the depo rate will peak at >=3.50%, implying yields have further room to run.

The December dots confirmed the Fed’s intention to raise the policy rate north of 5% and to keep it above neutral over the policy horizon. US yields rebounded, but markets doubt this guidance as recessionary fears linger. The February policy meeting (+25 bps) again failed to convince them but a stellar January jobs report did the trick. Support between 3.32% and 3.4% survived. The 10y yield instead is now focused at the 3.50/63% resistance area.

The dollar lost momentum in Q4 as US inflation started topping out. EUR/USD leaving a downtrend channel improved the technical picture with the euro receiving support from the ECB’s hawkish twist, lower energy prices and a bullish risk sentiment at the start of 2023. The pair tested 1.10 on the Fed/ECB combo. A break failed with the dollar instead gaining momentum post-payrolls.

The BoE raised its policy rate by 50 bps in February, but suggested that rates will peak after a final move in March. The UK central bank that way causes a yield disadvantage for sterling, which already has weak structural cards (e.g. weaker growth prospects, twin deficits, long term brexit consequences …) EUR/GBP is breaking through the high 0.88 resistance (recent highs) zone. There’s little in the way technically towards 0.92.

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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