Wednesday, 12 April 2023
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•          Several Fed and ECB speakers hit the wires yesterday and provided some distraction during an otherwise news calm trading session. There’s a divide growing among Fed officials to hike rates further or not. The likes of Chicago Fed president Goolsbee call for “prudence and patience” and first want more data to assess the impact of potentially tighter credit conditions following the collapse of several regional US banks. That’s clearly the minority view though. NY Fed Williams said one more hike as suggested by the dot plot is a “reasonable starting place” but that the actual path depends on incoming data. Kashkari from the Minneapolis Fed sees hopeful signs that calm has returned and said that the central bank has more work to do. Bullard (St Louis), Harker (Philadelphia) and Mester (Cleveland) struck a similar tone and added that rates would have to stay at their peak for some time. ECB’s Villeroy is worried about inflation becoming even more widespread and potentially more persistent. He referred to underlying inflation rising steadily even as headline inflation has topped off. This requires raising rates further, though possibly not as aggressive as before, and in any case keeping them at a high enough level for a sustained period. Core bonds lost ground with German Bunds hugely underperforming USTs yesterday. In a catch-up move with the US after being closed on Friday and Monday, German rates rallied 10.7-15.2 bps with the front underperforming. American yields only added 1.3 bps at the front but that’s hiding an intraday recovery move that went as far as 12 bps. European equity sentiment was especially good. The Euro Stoxx 50 closed at the highest level since begin 2022. With the yield and sentiment advantage, EUR/USD rose to 1.091. That combo is also what weighed the yen down. EUR/JPY extended gains beyond 145 to finish at 145.89. USD/JPY held stable around 133.6. EUR/GBP again used support from the upward sloping trend line to close somewhat higher at 0.8783.
•          Asian markets show no clear direction going into today’s main event: US CPI. Headline inflation in March is expected to ease from 6% to 5.1% but core inflation could increase from 5.5% to 5.6% on a strong 0.4% m/m pace. An in-line or higher-than-expected outcome should further strengthen the case for a May rate hike by the Fed. Markets currently attach a 75% probability to such a scenario. We doubt it will change their thinking about rate cuts later on though. Current market pricing shows the cutting cycle to begin in September. It will take more strong data points for that to be priced out. Barring a downside surprise, today’s CPI in any case should support yields, especially at the front end of the curve. The $32bn 10y auction tonight might be interesting for the long(er) end. First resistance in the 10y yield is located at 3.50%, followed by 3.64%. UST underperformance vs Bunds may give the dollar some much-needed breathing space. This morning’s move included, the small USD uptick vs the euro over the past few days gets wiped out already. Support for the dollar kicks in at EUR/USD 1.0973/1.1033. USD resistance levels are located around the 1.08 big figure, followed by 1.0735.

News Headlines

•          Climate think thank Ember published its fourth annual global electricity review. Wind and solar reached a record 12% of global electricity in 2022. We might as well have seen the peak of fossil fuel electricity generation last year which was unexpectedly boosted by the rush for energy security in the wake of the Russian invasion in Ukraine. Wind and solar are set to expand enough that total electricity production from fossil fuels will decline slightly and continue downward through at least 2026, according to the Ember forecasts. The share of fossil fuel electricity generation is set to decline from currently around 60% to slightly over 50% by 2026. The International Energy Agency earlier said that renewable power sources in 2022 helped to meet the vast majority of additional power needs.
•          Italian PM Meloni yesterday evening unveiled the 2023 budget which included slightly more tax cuts (€3bn) than expected. The budget deficit is set to reach 4.5% of GDP with growth predicted at 1% this year (vs 0.6% previously) and 1.5% in 2024 (vs 1.9%). Critical to next year’s outlook will be receiving EU instalments under the EU Recovery Fund which are at risk of delay over discussions on some of the projects, milestones and targets to be reached.


The ECB stuck to its plan to hike the deposit rate by 50 bps in March despite recent turmoil around some regional US banks and Credit Suisse. It provided no specific guidance for the May meeting, but clearly stated that more ground has to be covered if inflation develops as forecast (>2% over policy horizon) and recent uncertainty wanes. Such scenario should put a floor below yields despite the huge amount of volatility.

The Fed delivered a 25 bps dovish hike in March. Uncertainty around the fall-out from the regional bank implosion clouds the outlook. The new dot plot suggests one more final move this year. It does not show rate cuts pencilled in for 2023 but markets beg to differ. Short-term US yields tanked. Longer tenors suffer from recessionary fears. March payrolls eased pressure on the 3.3% support area but a return above 3.50% is needed to call off the downside alert.

The euro profited from the ECB’s unabated hawkish stance and subsiding energy concerns. The nearing end of the Fed cycle combined with local financial stability concerns meanwhile weighted on the dollar. EUR/USD surpassed 1.0735 resistance and aims for the 1.1033 YTD top even as uncertainty on financial stability also affected European markets. Some consolidation might be on the cards for EUR/USD in the short run.

The usually risk-sensitive pound proved surprisingly resilient during the banking turmoil. The BoE raised rates by 25 bps. A next move higher is still conditional but in any case priced in already. Divergency within the BoE about the way forward contrasts with ongoing hawkish ECB rhetoric. It adds to the already weak structural GBP cards (weaker growth prospects, twin deficits, long term brexit consequences…).

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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