Thursday, 7 April 2022
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•          FOMC Minutes took centre stage yesterday and rightly so. They confirmed willingness from Fed governors to step up the tightening cycle. Many participants noted that one or more [half-percentage-point] increases in the target range could be appropriate at future meetings, particularly if inflation pressures remained elevated or intensified. Apart from the bigger rate hikes, Minutes offered details on the Fed’s balance sheet reduction plan which will be presented and started at the May 4 policy meeting. The Fed will stop reinvesting the proceeds of maturing assets at a monthly pace of $95bn. This will be split over $60bn of US Treasuries and $35bn of mortgage-backed securities. The US central bank gives itself three months’ time to arrive at this pace. Once the quantitative tightening process is decently up and running, the Fed will contemplate active selling of mortgage-backed securities in addition to the natural roll-off. The US central bank indicated earlier that it wants to end up with US Treasuries only (currently $5.8tn) on its balance sheet. The total amount of MBS on the Fed’s $9tn balance sheet is around $2.7tn. If the natural amount of monthly maturities doesn’t reach the targeted $95bn, the Fed will top-up the amount by releasing treasury bills. The Fed’s hasty normalization plans have a feeling of “behind the curve” around them. Only 1 month ago, the Fed was still buying bonds on a net basis. In the previous QT-cycle, it took them one year to hit the maximum speed of $50bn/month.
•          The US yield curve steepened again in a daily perspective with 2-5y tenors losing up to 5 bps (3-yr) and 7-30y tenors gaining up to 5.9 bps (20-yr). The German yield curve steepened as well with the pivot point at the 5y. Intraday changes ranged between -1.8 bps (2-yr) and +6.3 bps (30-yr). The trade-weighted dollar set a new recovery high at 99.77, eventually closing around 99.60. EUR/USD dipped below 1.09 for the first time since early March to close at 1.0896. Stock markets didn’t take the message (and the recent bond sell-off) well with key European and US indices losing over 2%. From a technical point of view, the EuroStoxx50 rebound failed to regain lost support just above the 4k, triggering strong return action lower and keeping the sell-on-upticks pattern in place. Today’s eco calendar is thin with only US weekly jobless claims. A speech by BoE chief economist Pill serves as a wildcard. Markets are disconnected with the BoE’s recent more dovish guidance going forward. They don’t think that the BoE will be able to slow its tightening cycle because of the developing cost-of-living crisis.

News Headlines

•          China’s State Council at a meeting yesterday hinted it will step up monetary policy stimulus to support the economy. It said so as “complexity and uncertainty of domestic and foreign environments have intensified, and some have exceeded expectations”. The State Council didn’t mention any specific steps. Similar hints previously, however, came just days before the central bank cut the reserve requirement ratio. The pledge for more support followed Chinese PMI’s (Caixin) dropping deep into contraction territory as a result of harsh lockdowns and a zero-Covid policy. The Chinese yuan finished stronger yesterday, at USD/CNY 6.36. In a broader perspective, the currency has been remarkably strong even as monetary policy divergence probably couldn’t be bigger.
•          Italian PM Draghi yesterday said it would support an embargo on Russian gas if proposed by the EU. Currently it is not on the table, Draghi added. It does show how minds are evolving since Italy imports about 95% of the gas it consumes, with 40% coming from Russia. Draghi’s comments came after the EU just recently decided to impose a ban on Russian coal imports. European coal futures as a result this month alone already jumped by 14%. The EU is by far the most important buyer of Russia’s thermal coal.


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. QE is to end in Q3 with a rate hike in the next quarter. First meaningful correction in over a month as the threat of new sanctions makes the ECB’s balancing act even tougher.

The Fed started its tightening cycle and published an aggressive blueprint for the remainder of the year. A 50 bps rate hike May is likely. The US yield curve extended its bear flattening trend. Plans to shrink the balance sheet will be published in May. Medium term, the sell-off on core bond markets isn’t over.

The ECB sticking to – accelerating even – the normalization schedule is a (latent) positive for the common currency. After first protecting EUR/USD’s downside, it next triggered a test of first resistance at 1.1121. A sustained break higher didn’t occur with the pair now at risk of falling out a closing triangle pattern as stakes in the Russian war are raised. A break lower puts EUR/USD 1.0806 back on the radar.

EUR/GBP took out the first resistances between 0.82 and 0.83. The March ECB and BoE meetings restored some kind of monetary policy balance. The BoE even turned more dovish, but markets question this turn. EUR/GBP is showing signs of bottoming 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).
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.
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