• Friday’s strong US jobs report dashed any hopes – fueled by weaker data at the beginning of last week – that the Fed is able to ease the tightening pace any time soon. Especially the drop in the unemployment rate back to a 50-year low caught the eye. US stock markets reacted negatively; good news is bad news in the current environment. Equities slid between 2.11% (DJI) and 3.80% (Nasdaq). The S&P500 closed at the June lows. Core bonds took a hit and, with it, erased virtually all gains made earlier in the week. US yields rose between 5.1 and 7.5 bps across the curve. The 2y yield tested the previous cycle high of 4.34%. German yields fell in lockstep. The curve steepened with daily changes between 6.8 bps (2y) and 10.9 bps (10y). European swap yields added about 2 bps on top of that. Dollar strength was name of the game in currency markets. EUR/USD eased from 0.979 to 0.974. The trade-weighted dollar index extended gains beyond 112(.8). USD/JPY closed above 145 for a second day straight in a move that makes the Japanese Ministry of Finance feel very uneasy. Sterling shed ground during the risk-off session. Cable (GBP/USD) retreated from 1.116 to 1.109. EUR/GBP knocked on 0.88 but that door stayed shut for now.
• Stocks in Asia trade heavy in the wake of WS’s sell-off amid thinner-than-usual liquidity (Japanese markets closed). Chinese/Hong Kong tech stocks tumbled 4% after the US expanded technology curbs on China’s access to American technology (see below). Broader Chinese markets slide too after returning from a week-long holiday (Golden Week). Private (Caixin) Chinese PMIs unexpectedly dropped in contraction territory on a setback in the services sector (fell from 55 to 49.3). The onshore yuan opens unchanged after the week off, around USD/CNY 7.11. USD/JPY inches further north of 145 amid general dollar strength. Core bond futures trend gently higher. UST cash markets won’t open today for Columbus Day. Wall Street is open for business though.
• The annual meeting of the Institute of International Finance and the IMF & World Bank kicks off while the ECB holds an online conference on monetary policy. The avalanche of high-profile speakers scheduled for today and the rest of the week serve as a wildcard for trading. Russian president Putin accused Ukraine of a terrorist attack on the Crimean bridge over the weekend and called for a meeting of his security council today. It’s unclear whether it marks another escalation in the conflict with possible retaliatory countermeasures as a result but it sure won’t help an already fragile risk sentiment. The economic calendar later this week is well-filled with FOMC meeting minutes on Wednesday, September US CPI on Thursday and US retail sales and consumer confidence (Michigan University) due on Friday.
• US President Biden on Friday announced new chip technology curbs against China. They aim to prevent China from developing their own semiconductor industry and to slowdown development of military capabilities. The measures include export restrictions for some chips related to AI and supercomputing and tighter rules for semiconductor manufacturing equipment sales to any Chinese company. The new rules enter into force this month and already drew a reaction from the Chinese foreign ministry. A spokeswoman said that the curbs deal a blow to global industrial and supply chains and world economic recovery. In this respect, they will also hurt the interests of US companies, she added.
• Rating agency Fitch revised the outlook on Austria’s AA+ rating from stable to negative because of downside risks to the nation’s macroeconomic outlook and public finances stemming from energy supply and prices. A prolonged supply cut from Russia leaves the country vulnerable given its limited domestic alternatives and the sizeable gas needs of the manufacturing sector. Fitch now expects a 0.2% GDP contraction next year (compared to 2.4% expansion prediction in April). The fiscal deficit will reach 3.2% this year and widen to 3.4% next. The public debt ratio is expected to slide further towards 76% by end 2024, coming from a 83% peak in 2020. S&P and Moody’s have a similar rating on the Alpine nation, but for now keep the outlook stable.
The ECB ended net asset purchases and lifted rates by a combined 125 bps at the July and September meetings. More tightening is underway but the ECB refrained from guiding markets on the size of future hikes. Germany’s 10-yr yield rose to its highest level since 2011 (2.35%) with real rates driving the push higher. The correction end of September soon found support at the June high.
The Fed policy rate entered restrictive territory, but the central bank’s job isn’t done yet. The policy rate is expected to peak above 4.5% early next year and remain above a neutral 2.5% over the policy horizon. QT hits max speed. The 10y reached its highest level since 2008 (4.01%) and may soon be revisited.
EUR/USD is in a strong downward trend channel since February. The dollar remains the main beneficiary of rising US (real) yields in a persistent risk-off context. Geopolitical and recessionary risks are bigger for Europe, holding down the single currency as well even as the ECB finally embraced on a tightening cycle. Resistance stands at EUR/USD 0.9950/1.0050.
The UK government had to backtrack on part of its lavish fiscal spending plans which sent sterling initially tumbling towards the EUR/GBP 0.90+ area. Yawning twin deficits and rising risk premia will continue to weigh on the UK currency even as markets think that the BoE will have to counter fiscal support with additional monetary tightening.
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.
Sunset Monday, July 24, 2023 Daily Market Overview Click here to read the PDF-version of this report. Markets • The July European PMIs painted a bleak picture of the economy. They also all missed expectations. The composite indicator Read more…
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