Thursday, 9 March 2023
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•          US and European interest rate markets diverged further yesterday. German/EU yields didn’t see much spill-over from Tuesday’s sharp post-Powell repositioning in US markets. The German curve inverted further (2-y yield up 2.5 bps, 30-y minus 6.4 bps) in a session deprived of data. US yields initially corrected lower, but fortunes again changed in US dealings. ADP private job growth came in at a solid 242K. Higher than expected JOLTS job openings, laid the groundwork for an intraday reversal in US yields. Fed Chair Powell in his hearing before the House stressed that no decision has been made on the magnitude of the March 22 rate hike as it remains conditional to the totality of incoming data, including tomorrow’s payrolls and next week’s February inflation. This ‘conditionality’ didn’t change markets’ assessment that the bar will be high for the Fed not to return to a 50 bps step. The Beige book, preparing the March 22 Fed meeting, showed (anecdotic) evidence that the US economy held up well at the start of the year. A $32bn 10-y auction only drew mediocre investor interest. In the end, US yields gained 6.2 bps (2-y) to 2.2 bps (30-y). The real 10-y yield also made another step higher (1.66%, +8.5 bps). Still, this hardly had any impact on equities (Dow +0.18%; Nasdaq +0.4%) or the dollar. DXY closed almost unchanged at 105.66. Similar conclusion for EUR/USD (close 1.0545). Given additional interest rate support over the previous two sessions, this is slightly disappointing for USD bulls. EUR/GBP holds a tight range close to, mostly north of 0.89, but finished at the big figure.
•          Asian equities mostly show modest losses this morning with Japan outperforming. Chinese CPI inflation unexpectedly dropped from 1.9% Y/Y to 1%. PPI factory prices drifted further into negative territory (-1.4% Y/Y). The yuan eases marginally to USD/CNY 6.97. Later today, the eco calendar is very thin with only US jobless claims. ECB governors from today on will abstain from comments on monetary policy ahead of next week’s interest rate decision. We expect mainly technical trading ahead of tomorrow’s US payrolls. Some consolidation on the recent rally in yields is likely, but we see the downside well protected. Regarding the dollar, additional interest rates support apparently isn’t enough to attract strong buying interest as long as equity resilience mitigates safe haven demand. Apparently, a solid payrolls report is needed for EUR/USD to go for a test of the EUR/USD 1.0484/61 support.

News Headlines

•          The Bank of Canada stood pat in March, keeping the policy rate at 4.50%. It’s the first time that no back-to-back hike occurred since the BoC started the tightening cycle in March last year. The decision was no surprise. In January, the BoC said it expected to keep rates stable after the hike back then, provided the economy evolved broadly in line with its outlook. Employment growth was surprisingly strong but growth in Q4 was slightly weaker than expected. The economic drag will last for several quarters, which should ease pressures in the labour market and moderate wage growth, the BoC said. Taking all the data into account, the central bank sticks to the idea that inflation (currently 5.9% headline, +- 5% core) is on track to hit 3% by the middle of this year. That said, the BoC keeps the option of further hikes on the table if necessary. The Canadian dollar underperformed global peers yesterday. USD/CAD closed above 1.38 for the first time since mid-October. Canadian yields tanked in a knee-jerk reaction before paring losses to some extent. They eventually closed 2.2 to 6.8 bps lower with the front end underperforming.
•          Poland’s central bank (NBP) stuck to a 6.75% policy rate, the rate applicable since September last year. Polish activity slowed down on the back of weakening consumption. Investment continued to increase though. The labour market remains strong, resulting in low unemployment. Inflation shot up in January to 17.2% y/y. In part due to a VAT reversal but also due to companies still able to pass through higher input costs. That said, the NBP noted that the observed PPI decline together with weakening economic activity and the delivered monetary tightening will support a decline in domestic CPI inflation in coming quarters. This will be a gradual process, with the updated inflation forecast not showing a return to (the upper bound of the) target before 2025. Growth forecasts were marginally lifted across the policy horizon. The Polish zloty traded stoic in the wake of the decision. EUR/PLN closed a little lower, at 4.68, in a move that started earlier..


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% to settle north of 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 1.0484/61 support.

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 (weaker growth prospects, twin deficits, LT brexit consequences …). EUR/GBP for now avoided a return above 0.90 as UK eco data suggest that the BoE has more ground to cover as well but sterling momentum probably deteriorated further post-Powell.

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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