Tuesday, 7 March 2023
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•          There was every reason to expect a calm session yesterday with Friday’s correction/consolidation on yield markets to continue into today’s appearance of Fed Powell before Congress. Eco data were few and second tier. However, calm was fiercely disturbed around noon. After ECB’s Wunsch on Friday, ECB’s Holzmann came up with some ‘out-of-the-box’ thinking on the ECB policy path. He advocated that the ECB might have to raise rates by 50 bps not only in March, but also in May, June and July. He considers that only 4.0% + levels will bring policy in a restrictive stance that will be effective enough to slow growth/demand and to bring (core) inflation down in a sustainable way. Holzmann’s view for sure isn’t the consensus. Yesterday, ECB’s lane and ‘dovish’ Portuguese member Centeno advocated a cautious, data-dependent approach. But it illustrates the lines along which the debate at next week’s meeting will evolve. European short-term yields made a sharp intraday U-turn. German yields closed between 10.1 bps (2-y) and 0.1 bp (30-y) higher. US yields lagged the sharp move in Europe. Even so, initial gains (in bonds) also crumbled and US yield closed between 0.5 and 3 bps higher. The impact of the yield rebound on other markets was modest. Even so, it capped further equity gains. The Euro Stoxx 50 closed 0.44% higher. US indices finished little changed. The jump in EMU yields this time also propelled the euro. EUR/USD closed at 1.0681 (from 1.0632). Euro strength also pushed EUR/GBP higher in the established range (close 0.8882). The likes of USD/JPY showed no clear directional trend (close marginally lower at 135.95).

•          This morning, Asian equities are trading mixed (Nikkei +0.22%, CSI 300 -1.28%). US Treasuries and the dollar are trading little changed with markets counting down to the appearance of Fed Chair Powell before the Senate later today. We expect the Fed Chair to reiterate that rates will have to be raised at least in line with the December dots. However, he might not be too specific with payrolls and CPI still to be released before the March 22 meeting. Such a ‘guarded’ hawkish stance might extend some further ST consolidation in US bond markets. A sustained break of the US 10-y above 4% probably has to come from the data (or auctions of LT US bonds this week) rather than from Powell’s guidance. Such a scenario also won’t help the dollar short-term. First importance resistance in EUR/USD (1.0803) is still some distance away. So, the technical picture shouldn’t change in a profound way.

News Headlines

•          Australia’s central bank (RBA) hiked policy rates by 25 bps to 3.6% this morning. It acknowledged the fact that inflation probably has peaked and should decline this year and the next to be around 3% in mid-2025. The RBA notes some divergence between decelerating goods price inflation and still-high services inflation. Household consumption adds to the latter but is nevertheless slowing due to tighter financial conditions and a softened housing outlook. In contrast, the business investment outlook is positive. The labor market remains strong and wage growth continues to pick up. The RBA does note that recent data suggest a lower risk of a wage-price spiral. Given elevated inflation and the additional economic cost it would take should this become entrenched in people’s expectations, the RBA thinks more monetary tightening is necessary. This time around however, the central bank introduced the possibility of a pause first instead of hiking back-to-back. This new element of timing dominated the market reaction. Australian money markets have largely priced out an April rate hike and have lowered the peak rate expectations from 4.15% to 4%. Swap yields in the region drop 5.8-14 bps with the front outperforming. The Aussie dollar retreats from AUD/USD 0.675 ahead of the decision to 0.67 currently. This level acts as important support.

•          Chinese exports dropped 6.8% in the first two months of 2023 from a year earlier. The biggest drag came from equipment used for data processing along with LCD displays and integrated circuits. Exports are expected to face continued downside pressures as global demand/trade weakens. The country also announced a more domestically focused approach yesterday, suggesting that exports lose significance as the economic stronghold. Imports on the other hand fell a stronger 10.2% over the same period, bringing about a trade surplus of $117bn. Weighing on imports were semiconductor parts and steel products. This contrasted with a jump in purchases of coal, rare earths and edible oil. China’s yuan trades subdued this morning. USD/CNY hovers around 6.936 opening levels.


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 to the cycle top just north of 2.50%. A strong batch of eco data served as a global wake-up call. The 10-y yield was hurled to new cycle highs as markets further adjust ECB rate expectations to 4.0%. With the 2.57% resistance left behind, 3% is the next target.

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. Markets refused to follow this guidance up until the wake-up call coming from strong Jan & Feb eco data. The US 10-yr yield surpassed resistance around 3.95% and surpassed the 4%. If confirmed, a return to the 2022 cycle top is inevitable.

USD lost momentum in Q4. EUR/USD left a downtrend channel improving the technical picture. The euro received support from the ECB’s hawkish twist, lower energy prices and a risk-on sentiment. The pair tested 1.10, but a break failed with the dollar regaining momentum post strong US January data. EUR/USD dropped below support at 1.0735/1.0656, opening the way to the 1.0484 2023 low.

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 for now avoided a return above 0.90 as UK data suggest the BoE has more ground to cover as well.

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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