Thursday, 7 September 2022
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•          The biggest move in core bonds happened on UK soil. Gilt yields crashed 20bps at the front end of the curve. Some BoE officials, testifying before Parliament, pointed out that the new government’s energy plans would curb inflation. Markets figured it could potentially lower the need for rate hikes. Other elements playing in favour of bonds, not only UK’s, were faltering energy prices. Brent oil ($88/b, -5.7%) fell through key support at $92.09. Gas (Dutch TTF) tanked 12% as a flurry of price-curbing proposals to be tabled at tomorrow’s EU summit rolled over the screens. The German yield curve bull flattened, changing between 1.3 bps and 7.8 bps. Bunds outperformed UST’s until Brainard came to talk. The Fed vice-chair stressed the central bank’s commitment to bring inflation back to target though cautioned risks will become two-sided at one point. She added that uncertainty on the lag of monetary policy effects create risks for overtightening. US yields eventually declined 7.3 bps to 9.6 bps across the curve. The dollar lost some ground as a result. EUR/USD rebounded more than a big figure from sub 0.99 to parity. There was certainly some euro strength involved too. The common currency took heart from easing gas prices. USD/JPY tested the 145 barrier before closing at 143.74. DXY couldn’t stay north of 110. Evaporating short-end rate support hurt sterling. EUR/GBP jumped to 0.8675. GBP/USD however avoided a close sub 1.15 on the back of a weaker dollar. Equities recovered, especially in the US. The Nasdaq closed more than 2% higher. The Asian session runs smoothly this morning. Stocks thrive in Japan and Australia. The latter is supported by RBA governor Lowe hinting at a slower tightening pace than the 50 bps at the last four meetings. Australian yields tumble more than 16 bps (3-5y) and the Aussie dollar lags peers this morning. The US dollar firms a bit. USD/JPY settles above 144, EUR/USD hovers around 1. Core bonds extend yesterday’s correction higher going into Fed Powell’s speech on monetary policy – the last one before the blackout period kicks in – and the ECB meeting today. The bar Lagarde needs to meet is set at 75 bps. Doing so, as we expect given that new inflation forecasts will again have been revised upwards materially, should keep the downside in European yields protected. After today’s meeting, money markets currently discount 75 bps additional tightening for the final two meetings of this year (which we find too conservative). Renewed upward yield pressure thus depends on the ECB president’s hawkishness and commitment on frontloading. If Lagarde delivers, the euro may find some support, but possibly not more than in a daily perspective. Aside from the rate hike, we’ll watch the Q&A for hints regarding balance sheet reduction (a plan before the end of the year?) and the ECB’s approach to the matter of TLTRO’s (reversed tiering, early repayment incentives?).

News Headlines

•          The Bank of Canada as expected raised the overnight rate by 75bps to 3.25%. In July, the BoC hiked by 100bps. The BoC signals further hikes to bring inflation back to its 2% target. The economy operates in excess demand and labour markets remain tight. Inflation eased in July to 7.6% from 8.1% due to a drop in gasoline prices, but core inflation remains upwardly oriented, indicating a further broadening of price pressures, particularly in services. The market currently discounts the policy rate between 3.75% and 4.0% by the end of this year/early next year. So a scenario of 50 bps in October and 25 bps in December isn’t fully priced in. The Canadian dollar strengthened from USD/CAD 1.32+ to USD/CAD 1.312. However, part of this move was due to an overall USD correction.

•          The National Bank of Poland further slowed the pace of tightening to 25bps, bringing the policy rate to 6.75%. Activity in Q2 slowed (-2.3% Q/Q and 5.3% Y/Y, from 8.5% in Q1) and the NBP expects that process to continue over the next quarters. Still, the labour market remains strong. Inflation (Aug) increased to 16.1%. A big part is due to external factors but enterprises passing through higher costs is raising core inflation too. Upward prices pressures might persist short-term, but interest rate hikes, slower growth and fading impact op supply shocks will ease inflation over time. This also should be supported by a strong zloty which the NBP estimates undervalued. Further steps are data dependent. Governor Glapinski will comment on the rate decision later today. Recently he indicated that the rate hike cycle might be nearing its end. The zloty yesterday rebounded slightly to EUR/PLN 4.712.


The ECB ended net asset purchases and lifted rates with a 50 bps inaugural hike. More tightening is underway. A 75 bps hike is on the table at the September meeting. Germany’s 10-yr yield broke out of the corrective downward trend channel mid-August. Forceful return action higher since then met some resistance around the 1.50%/1.65% zone.

The Fed hiked to neutral by a back-to-back 75 bps in July. The size of future moves depends on the incoming data. QT hits max speed in September. The 10y briefly dropped below the lower bound (2.70% area) of the sideways trading range, but a sustained break lower was averted. The focus is back on central bank frontloading to tackle inflation.

The euro zone’s (energy) crisis is being accompanied by an Italian political crisis, weighing down the euro. Hawkish Fed comments at Jackson Hole and the simultaneous sell-off in bonds & equities pushed the euro to new lows below parity. This year’s downward trend channel and systematic failure to leave YtD lows behind suggest more downside.

The Bank of England hiked by 50 bps in august. More hikes are coming but are priced in already. Combined with the BoE’s grim economic assessment it triggered a profit-taking move. EUR/GBP broke out of the corrective downward trend channel since mid-June but and is about to test the YTD high at 0.8721.

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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