Tuesday, 12 April 2022
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•          The bond market sell-off continued unabatedly yesterday. Last week’s ECB and Fed minutes made investors realize that the era of low interest rates is definitely over. Multiple US and EMU yields set new cycle highs or broke above important, longstanding technical levels. US investors still pondered the consequences of an accelerated balance sheet roll-off, sharply steepening the curve. The 2-y yield took a breather (-1.4 bp), but longer maturities rose up to 9 bps (30-y). The 10-y yields closed north of 2.75%, bringing the 3.0% area on the radar. Interestingly, the move was still more or less equally driven by higher real yields and inflation expectations. The latter suggests that the market still sees room for the Fed to further step up the pace of tightening. In Europe, the steepening trend was more modest with the German 2-y yield gaining 8.3 bps and the 30-y up 11.9 bps. At 0.816%, the 10-y Bund yield surpassed the key 0.80% 2018 top. The 2-y EMU swap touched the 0.78% 2013 top! The sharp rise in interest rates, combined with persistent geopolitical tensions and rising doubts on growth (in China, but also elsewhere) triggered a further risk-off repositioning on equity markets. US indices lost from 1.19% (Dow) to 2.18% Nasdaq. Despite a the broad uptrend in yields also for non-USD currencies, King dollar this time fully enjoyed its safe haven status. The DXY TW index surpassed the 100 barrier. EUR/USD failed to maintain opening gains (French election result) and closed at 1.0884. The yen again underperformed. USD/JPY just failed to touch the 125.86 2015 top (close 125.36).

•          This morning, there is no sign of any calm returning to the bond markets. US yields again are rising another 3-4 bps across the curve. Most Asian equity indices are trading in the red, with China the exception to the rule. The Nikkei underperforms (-1.65%) despite persistent yen weakness. The Japanese Finance Minister stepped up verbal interventions as he said that sudden FX moves are undesirable and that the government will monitor FX moves with vigilance. The impact on the yen was limited (USD/JPY 125.45).

•          Today, the March US CPI release takes center stage. Headline inflation is expected to accelerate to 1.2% M/M and 8.4% Y/Y. For the core measure a 0.5% M/M rise to 6.6% is expected. Headline inflation might be close to the top. However, the persistent high pace in the M/M price rises justify the Fed’s red alert anti-inflation modus. So, we see little reason to expect a big correction on current uptrend in (US) yields. European yields breaking key levels recently (10-y swap and Bund north of 1.37% & 0.80% respectively, 2-y swap at 0.78%) also suggest no pause ahead of Thursday’s ECB meeting. On FX markets, the dollar remains in pole position. EUR/USD is at risk returning to the 1.0806 YTD low. UK labour market data published this morning were close to expectations, but BRC retail sales felt headwinds from pressure on UK citizens disposable income (cf infra). EUR/GBP hovers near the 0.8350 pivot with first important support at 0.8307/0.8296.

News Headlines

•          CNB policy maker Benda said Czech inflation probably hasn’t fully reflected all new external factors yet, suggesting yesterday’s figure of 12.7% y/y will probably rise further in coming months. Benda expects the strong price growth to persist longer than projected previously. A return to the 2% target may be delayed by half a year to end 2023, he said. Vice governor Nidetzky also commented on Monday’s CPI release. He believes rates would have to be raised slightly more in a response, describing follow-up hikes as “fine-tuning”. He is, however, aware of the tightening’s consequences on the economy and said it needs to be taken into consideration in further decisions. The Czech koruna finished stronger at EUR/CZK 24.43 on Monday.

•          The UK British Retail Consortium (BRC) reported a sharp retreat in sales in March. Retail (same-store) sales were down 0.4% after a 2.7% rise the month before. Retailers warn of “clouds on the horizon”, BRC said, referring to higher prices cutting into consumer spending power and confidence. The consortium sees few reasons to be optimistic with the full impact of the recent rise in energy prices and nation insurance changes yet to be felt by households. It is the cost-of-living crisis in full swing.


European yields (more than) recovered from the early stages of the Russian-Ukrainian war as the expected growth slowdown didn’t deter the ECB from stepping up the normalization plans. QE is to end in Q3 with a rate hike already possible in the same quarter. The trend in yields remains north. The German 10-y yield surpassed the 0.80% 2018 top, signalling that European bond markets are entering a new era.

The Fed started its tightening cycle and published an aggressive blueprint for the remainder of the year. A 50 bps rate hike May is likely. The US yield curve initially developed a bear flattening trend. However, plans to shrink the balance sheet to be published in May also support yields at longer maturities. The sell-off on core bond markets isn’t over. The 3.0% for the 10-y is coming within reach.

The ECB sticking to – accelerating even – the normalization schedule was a (latent) positive for the common currency. After first protecting EUR/USD’s downside, it next triggered a test of first resistance at 1.1121. A sustained break higher didn’t occur as the dollar remains in the driver’s seat. EUR/USD falling out a closing triangle pattern puts EUR/USD 1.0806 back on the radar.

EUR/GBP took out the first resistances between 0.82 and 0.83. The March ECB and BoE meetings restored some kind of monetary policy balance. The BoE even turned more dovish, but markets question this turn. EUR/GBP is trading off the 0.8203 2022 low, but further gains in the 0.83/0.85 area remain difficult for now.

Calendar & Table

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