Wednesday, 11 May 2022
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•          The equity sell-off took a breather yesterday. European stocks eked out gains of less than 1%. Markets in the US slid early in the open but rebounded later, ending the session with gains for the S&P (0.25%) and the Nasdaq (0.98%). They found some comfort in further declining core bond yields. Fed and ECB talk remained hawkish but didn’t bring any new insights. Fed members Waller, Bostic, Williams and Mester all backed 50 bps for the next two (maybe three) meetings. Mester stood out in not ruling out a 75 bps “forever”. It helps explain the underperformance of the short end of the US curve despite a strong $45bn 3y auction. Yields rose 2 bps in the 2y but eased up to 4.3 bps in the 7-10y sector. German Bunds outperformed the US. The curve bull flattened with changes ranging from -6.8 bps (2y) to   -9.5 bps (10y). Peripheral spreads narrowed. Italy (-5bps) outperformed. ECB’s Nagel and de Guindos indicated in a speech their preference for a rate hike lift-off in July but had limited impact. Markets are a few bps short of fully pricing in such a scenario. Oil prices eased for a second day straight. Natural gas diverged by erasing earlier losses and gaining 11% from the intraday lows after Ukraine said Russian gas flows to one of the two key entry points that serve as a transit to Europe will halt from today on. The dollar on FX markets reversed early weakness into marginal strength. EUR/USD retreated to 1.053, USD/JPY held above 130. UK PM Johnson signaled readiness to tear the NI protocol apart in the wake of the Northern Irish elections last week, saying it was undermining the Good Friday Agreement. It brings the UK back at collision course with the EU. For now, sterling has little attention for the matter but it’s worth following up. EUR/GBP held a tight sideways trading range around 0.855.

•          China reporting a decline in Covid cases make its bourses jump to the tune of 2-3% this morning, outperforming during a mixed Asian trade session. It helps the yuan strengthen a bit for the first time in five days despite a mixed CPI reading. The USD trades lower in general. Core bonds hover sideways.

•          US CPI in April is expected to have slowed down to 8.1% from 8.5% (6% from 6.5% in the core). These are largely statistical base effects at work. The key question at the current junction, however, is how strong the monthly dynamics still are. In the end, this will determine how quickly yearly inflation will return to its goal. We believe the monthly (core) figures will remain elevated for some time still. In Europe another carpet bomb of ECB speeches is coming our way. Our attention goes in particular to ECB’s Lagarde. Will she side with the likes of Nagel, Wunsch and de Guindos? It would mark a dramatic turnaround, one that the euro and bond yields would surely notice. If she keeps kicking the can down the road, EUR/USD may lose the 1.05 barrier today.

News Headlines

•          Price rises in Hungary accelerated at a faster than expected pace in April, jumping 1.6% M/M to 9.5% Y/Y (was 1.0% and 8.5% in March). Core inflation data as published by the central bank also rose, accelerating from 9.1% to 10.3%, reaching the highest level since 2001. Monthly prices gains were broad-based across different sub-categories with food (3.6%), clothing (2.8%), housing (0.9%), furnishings (1.7%) and transport (0.9%) catching the eye. As such, inflation is moving further away from the MNB 3.0% target. The data keep pressure on the MNB to continue monetary tightening. The 2-y swap rate yesterday rose 7 bps tot 8.50%. The forint traded marginally stronger in the EUR/HUF 380 area, but this was mainly due to a better risk sentiment.

•          China April price data this morning showed a mixed picture. Headline CPI rose from 1.5% Y/Y to 2.1%. Comments from the Statistics Bureau attributed the rise to the virus outbreaks and higher global commodity prices. A rise in energy and food costs was the main driver behind the rise. Core inflation ex food and energy eased to 0.9% from 1.1%, suggesting less demand driven price pressures. PPI in April even slowed from 8.3% Y/Y  to 8.0% Y/Y. The NBS attributed this decline to measures of the government to stabilize commodity prices and improve supply. Today’s data are no obstacle for Chinese authorities to keep their efforts focused on (selective) measures to support growth. After a substantial weaking over the previous weeks, the yuan today gains marginally (USD/CNY 6.722).


The ECB will end net asset purchases in June. A first rate hike is likely in July (or even June?!). Speculation has caused real yields to bottom while inflation expectations have corrected lower from record highs. Being at elevated levels, they still suggest the ECB’s response will still be too little, too late. Technically, the 1% barrier serves as support. We look for a break of the 1.13% area to the upside to pave the way all the way up to 1.63/1.73%.

The Fed started its tightening cycle and published an aggressive blueprint for the remainder of the year. 50 bps rate hikes at the next meetings can be taken for granted. Quantitative tightening will start in June and hit max speed from September onwards. The psychologic 3% resistance turned into support. Next stop is 3.26% (2018 top).

EUR/USD lost the previous YTD low at 1.0806 and the 2020 bottom at 1.0636, suggesting a return to the 2017 low at 1.0341. ECB needs to step up its inflation response to give the single currency much needed backing. Russian war in Ukraine plays in the euro’s disadvantage as well.

The developing cost-of-living crisis seems to hit the UK economy first and the hardest. Weak economic data toughen the Bank of England’s dilemma in battling inflation with doubt starting to filter through in markets. Open division within the BoE and the limited room for further tightening pushed EUR/GBP above the 0.8512 level. A sustained break would be a bad omen for sterling.

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).
These market recommendations are the result of qualitative analysis, incorporating room for past experiences and personal assessments. The views are based on current market circumstances and can change any moment. The most prominent input comes from publicly available data, financial news, economic and monetary policies and commonly used technical analysis.
The KBC Economics – Markets desk has used reasonable efforts to obtain this information from sources which it believes to be reliable but the contents of this document have been prepared without any substantive analysis being undertaken into these sources.
It has not been assessed as to whether or not these insights would be suitable for any particular investor.
Opinions expressed are our current opinions as of the date appearing on this material only and can be opposite to previous recommendations due to changed market conditions.
The authors of this recommendation do not warrant the accuracy, completeness or value (commercial or otherwise) of any recommendation. Neither are the authors liable to those who receive these recommendations for the content of it or for any loss or damage arising (whether in tort (including negligence), breach of contract, breach of statutory duty or otherwise) from any actions or omissions of the authors in reliance on any recommendation, or for any claim whatsoever in respect of the content of, or information contained in, any recommendation. Any opinions expressed herein reflect the judgement at the time the investment recommendation was prepared and are subject to change without notice.
Given the nature of this advice (linked to currencies and interest rates) , the advice is overall not specific in nature.   As such there is no reference to any corporate finance contract and as such there is no 12 month overview based on the different advices.
This document is only valid during a very  limited period of time, due to rapidly changing market conditions.

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