Friday, 7 July 2023
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•          Most major centrale banks recently said that they moved to ‘data dependent modus’. For some of them, this translates into a pause/skip or some other term giving them time to assess the impact of previous policy tightening on inflation and on growth. At least part of the policy makers and the market community assumed/feared that the tightening already put in place over the previous 12-18 months was at risk putting the economy on a path straight to recession. Quod non, so told yesterday’s US data. ADP June private job growth jumped an astonishing 497k (from 267k and 225k expected). Weekly Jobless claims at 248k stayed off the ‘highs’ recorded a few weeks. Last but not least, the US services ISM unexpectedly jumped from 50.3 to 53.9, with strong details too. (prices paid 54.1; employment again in outspoken growth territory at 53.1, orders reaccelerating to a strong 55.5). This kind of monthly data swings evidently needs confirmation. Even so, combined with mostly decent other data of late, one should be open to the idea that the (US) economy was only going through a temporary dip, with a solid labour market still putting a strong flow for demand. In this scenario, the CB’s wait-and-see pause only caused a loss of precious time in their attempt to bring inflation back under control. A reacceleration/catching up move in the pace of policy action then pops up as a logical conclusion. US yields jumped between 3.6 bps (2-y) and 9.75 bps (5 &10-y) with even higher peak levels intraday. The US 2-y yield touched a new cycle top at 5.12%, the highest level since mid-2007! The US 10-y yield almost touched the March top near 4.09%. The move was again mainly driven by a jump in the real yield (10-y hitting a new cycle top at 1.82). German yields added between 6.3 bps (2-y) and 14.8 bps (10-y). The rise in real yields this time triggered a setback on equity markets (S&P -0.79%, EuroStoxx 50 -2.93%). As was mostly the case of late, the impact on major currency cross rates again was modest. Smaller currency were hit by a jump in volatility. Despite the sharp rise in US real yields, the dollar even lost marginal ground (DXY close 103.17, EUR/USD 1.0089). The yen slightly outperformed on risk-aversion (USD/JPY 144.07).  

•          Asian markets this morning open in risk-off modus, but given volatility on bond markets, the damage could have been bigger (Nikkei -0.93%). After yesterday’s barrage of ‘hawkish’ US data, the focus evidently turns to the US payrolls. A report slightly above expectations or even in line might already be enough to extend yesterday’s price pattern and push US yields on track of a break beyond key resistance levels (2-y 5/5.12%, US10-y 4.10% area). In theory a growing risk-off also should put the dollar (and the yen) in pole position.

News Headlines

•          Japanese wages rose more than expected in May. Labour cash earnings increased by 2.5% Y/Y vs 1.2% expected. It’s only the fourth time since the early 90’s that they rose at such pace (or more). It reflects the pay boost agreed in spring wage talks. Key unions and their employers reached an agreement to raise overall wages by the most since 1993 (3.8%) earlier this year. Adjusted for the cost of living though, real cash earnings fell 1.2% Y/Y (vs -2.7% Y/Y expected). Pressure on the Bank of Japan will nevertheless increase to pivot away from its ultra-accommodative monetary policy stance. The wage data clear an important hurdle on putting inflation on a sustained path to the 2% inflation target with BoJ governor Ueda at the ECB’s Sintra forum saying that wage growth should be slightly or well above 2% to achieve this. Japanese markets aren’t frontrunning any policy change. The Japanese yen has a small advantage over other majors (USD/JPY 143.70) with risk-off sentiment beating rising core (real) rates as main market driver. Japanese yields follow the global momentum with the 10y benchmark currently at 0.44% vs 0.40% yesterday morning. The BoJ has a 50 bps tolerance band around its 0% target for the 10y yield..

•          The National Bank of Poland kept its policy rate unchanged at 6.75% for a 10th straight meeting. Updated inflation forecasts show a faster CPI drop next year compared to March: 11.9% in 2023 (vs 11.85%), 5.25% in 2024 (vs 5.7%) and 3.6% in 2025 (vs 3.5%). Updated growth prognoses stand at 0.55% for this year (vs 0.85%), 2.35% next year (vs 2.1%) and 3.25% in 2025 (vs3.15%). The overall tone and forward guidance in the statement are again broadly unaltered (steady as they go). NBP governor Glapinski will hold a press conference this afternoon. The Polish zloty got hammered in yesterday’s market climate just like CZK and HUF. EUR/PLN bounced off recent lows the past two days to test 4.50 from 4.41.


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 an, we expect a solid bottom and with a potential return to the cycle top. First resistance at 2.56% is broken.

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 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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