Thursday, 10 November 2022
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There will be no KBC reports on Friday, November 11. We resume our publications on Monday, November 14.


•          Yesterday, a rather inconclusive outcome of the US midterm elections initially left markets looking for a clear driver. Sentiment gradually turned outspoken risk-off in US dealings with persistent uncertainty on the reopening of the Chinese economy due to COVID restrictions and noise spilling over from crypto markets as potential drivers. US equities ceded between 1.95% (Dow) and 2.48% (Nasdaq). The risk-off also caused Treasuries to reverse modestly initial losses. At the end of the session, US yields eased between 7.1 bps (2-y) and -0.75 bp (30-y). Even so, the sale of the $ 35 bln of 10-y US bonds went far less easy compared to Tuesday’s 3-year sale. It caused a temporary pause in the yield decline but didn’t change the trend. Fed speakers gave some mixed signals. Outgoing Chicago Fed president Evans favours a slowdown in the pace of rate hikes. Fed’s Barkin and Kashkari continue to advocate decisive action to arrest inflation and preventing inflation expectations to settle at a too high level. Bunds already outperformed Treasuries earlier in the session and maintained their bid with German yields easing between 11.3 bps (2-y) and 9.5 bps (30-y). The risk-off also helped the dollar to rebound from nearby support levels. DXY at 110.55 closed clearly above the 109.53 area (previous low/neckline). EUR/USD gave up its attempt to conquer the 1.0094/1.00 resistance area. A brief intraday spike on headlines that Russian troops will exit Kherson didn’t prevent to pair to close at 1.0011 (open 1.0074). The risk-off and markets pondering whether a more restrictive fiscal policy could lead to more benign BoE inflation response pushed EUR/GBP back to the 0.88 area.

•          Yesterday’s WS risk-off this morning also spills over to Asian markets (Nikkei -1.0%, Hang Seng-1.9%). The dollar is taking a breather of yesterday’s rebound (EUR/USD 1.003, USD/JPY 146.18). Evidently, the long-awaited for US CPI release will take center stage today. The headline inflation is expected to slow from 8.2% to 7.9%. Core inflation might ease from 6.6% to 6.5%. However, even this ‘topping out process’ still assumes monthly rises of 0.6% and 0.5% respectively. Such a pace for sure doesn’t meet the Fed’s aim to bring inflation on a sustained downward trajectory. Admittedly, we are a bit indecisive on the market reaction function. Up until now, it didn’t yield much to preposition for a softer inflation figure. At the same time, despite last week’s hawkish Fed guidance, markets reacted rather soft e.g. to a still solid labour market report, implicitly doubting the Fed’s resolve to bring the policy rate substantially above the 5.0% barrier next year. For the 10-y US yield, the 3.90% area remains very solid support. For the dollar we continue to monitor the 109.53 DXY level. For EUR/USD 1.0095/1.00 remains strong resistance. A break would open the way to 1.0198 September top.

News Headlines

•          The National Bank of Poland defied analyst and market expectations for a hike and kept the policy rate steady at 6.75% instead. Inflation increased to 17.9% y/y in October and new projections show upward revisions across the horizon: 14.4-14.5% in 2022, 11.1-15.3% in 2023 and 4.1-7.6% in 2024. First estimates for 2025 range between 2.1-4.9%. Growth forecasts were lowered though, especially for next year, as the NBP’s earlier tightening as well as weakening external economic conditions weigh. The central bank believes that such circumstances will support a decline in inflation towards target, albeit gradually. It would go quicker if the zloty appreciated towards levels seen consistent with economic fundamentals, the NBP added. While it hasn’t done so in recent months, the NBP to that end remains committed to FX interventions. The currency was disappointed following the decision. EUR/PLN rebounded from sub 4.7 to 4.71, surpassing resistance (zloty-support) from the 200MdA. Polish swap yields fell between 10-13.5 bps across the curve in a move that mostly followed earlier core bond yield trends.

•          The Hungarian government in draft legislation proposes to change the rules that force it to recapitalize the central bank’s (MNB) losses in a matter of days. Due to the MNB’s aggressive tightening cycle, it has accumulated huge losses (into several hundreds of billions forint) on, amongst others, its QE portfolio. Under current rules, the government is required to compensate the MNB in cash over a period of eight days. This comes at a time when the country is struggling to rein in a gaping budget deficit and several billions of euro funds are blocked over the rule-of-law spat with the EU. The government seeks to extend that to 5 years. This makes it easier to plan the budgetary effect, the Finance Ministry said.


The ECB ended net asset purchases and lifted rates by a combined 200 bps since the July meeting. 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 (2.5%) before a correction kicked in. The neckline of the double top formation at 2.14% was tested but survived.

The Fed policy rate was lifted by 75 bps to 3.75-4% in November and the central bank’s job isn’t done yet. But future hikes could be smaller from December or February on, depending on the data. Either way, the terminal rate is seen higher than projected back in September (4.5-4.75% early next year). Hikes are complemented by QT ($95bn/month). Market repositioning could allow for some further inversion of the curve.

USD for the largest part of this year profited from rising US (real) yields in a persistent risk-off context. Geopolitical and European recessionary risks kept EUR in the defensive even as the ECB finally embraced on a tightening cycle. EUR/USD for a second time this month tries to leave the strong downward trend channel since February. EUR/USD 1.0094 is first intermediate resistance ahead of the key 1.0350.

The UK government had to backtrack on 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 longer term. In addition, the BoE signaled less rate support than markets currently assume. First resistance is located around 0.89.

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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