Friday, 9 September 2022
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•          The world’s two biggest central banks were in focus yesterday. The ECB jacked up interest rates by an unprecedented 75 bps to bring the deposit rate at 0.75%. Growth may grind to a halt in the next two quarters but that’s of secondary importance to sky-high and rising inflation and the risk of unanchored expectations. The ECB sticks to a data-dependent and meeting-by-meeting approach. Lagarde, however, was crystal clear that more hikes are coming. Although saying that 75 bps was not the norm, she left the door for such a move in October wide open. It quickly became the base scenario for both markets and us. After the press conference the ECB published a statement in which it removed the 0% remuneration cap on government deposits to avoid treasuries hunting down already scarce short-term quality assets in the market. Bloomberg later still, citing officials, reported that the balance sheet reduction is expected to be debated for a first time at the October meeting. European bonds thus took a triple whammy. German yields skyrocketed 9.8 bps (30y) to 22.9 bps (2y, new cycle high). Germany’s 10y reference surpassed first resistance at 1.63/67%. Bunds hugely outperformed USTs, which were on the way down too as Fed chair Powell held a last important speech before the September 21 policy meeting. He reiterated the Fed’s determination to quell inflation and did little to alter expectations for a third 75 bps move. US yields rose between 5.4 and 8 bps across the curve. The euro on currency markets overcame a kneejerk move lower on Lagarde’s quote on 75 rate moves. EUR/USD finished at parity. Dollar’s trade-weighted index (DXY) closed a little lower sub 110. USD/JPY was able to eke out a small gain to 144.11 but the stretch higher went in reverse this morning. BoJ governor Kuroda called the rapid yen weakening undesirable. USD/JPY eases for the first time in 10 days to 142.8. It is however more a dollar move than it is yen strength. EUR/USD rises to test first minor resistance around 1.008. DXY (108.86) loses support from the previous cycle high at 109.29. Core bonds recoup some of yesterday’s losses. With the ECB as key event now out of the way, we think there may be scope for some short-term consolidation in bond yields. This may be more the case for Europe than in the US, where the Fed meeting is already looming on the horizon. We stay cautious on the euro and EUR/USD. Today’s European energy summit is an important one in tackling the gas crisis. Several measures, including a Russian price cap, have already met opposition by some member states. Lack of unity on and/or feasibility or credibility of the measures taken will disappoint the euro. EUR/GBP hitting but not pushing through first resistance at 0.87 is a bad technical omen for the common currency as well.

News Headlines

•          Inflation in China unexpectedly eased in August as both CPI and PPI slowed more than expected in annual terms. CPI inflation printed at 2.5% from 2.7% in July. Core CPI excluding volatile food and energy costs was unchanged at 0.8% Y/Y. PPI inflation slowed to 2.3% from 4.2%, the lowest level since February last year. The decline amongst others mirrors a slowdown in some commodity prices. Soft price growth also confirms recent other data evidence on slow growth as ongoing corona outbreaks and containment measures continue to weigh on domestic demand. Today’s data reinforce the case for further policy stimulus to support activity. Despite the lower-than-expected price data, the yuan this morning rebounds on broader USD correction. USD/CNY trades at 6.936, compared to a peak just below 6.98 two days ago.

•          At a press conference the day after the policy decision of the National bank of Poland, Governor Glapinski said that the NBP hasn’t formally ended the rate hike cycle. He indicated that a 25 bps hike or leaving rates unchanged are on the table at the October policy meeting. The NBP in this respect maintains a data-driven approach. The NBP governor also indicated that there might be room for interest rate cuts if inflation moves fast to single digit figures. According Glapinski, inflation might fall back to the 3% by the end of 2023 if the anti-inflation shield is extended and if there are no hikes of regulated energy prices. If regulated energy prices go up, inflation might only slow to 6-7%.


The ECB ended net asset purchases and lifted rates with a 50 bps hike followed by an unprecedented 75 move. Such a jumbo hike is also likely for the October meeting, during which QT will be discussed for a first time. Germany’s 10-yr yield broke out of the corrective downward trend channel mid-August and took out resistance at 1.63/1.67% following the hawkish ECB September meeting. The next reference is the June cycle high.

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, despite the ECB finally catching up with the Fed.

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 and is about to test the YTD high at 0.8721.

Calendar & Table

Note: All times and dates are CET. More reports are available at 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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