Thursday, 12 May 2022
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•          US headline/core inflation for April came in at 8.3%/6.2% yesterday, defying expectations for a bigger decline from the 40-year highs. Core inflation also showed more signs of broadening and being increasingly persistent. It wasn’t the surprise reading both markets and the Fed hoped for, fueling concerns of an aggressive tightening cycle that may smother the economy. US stocks initially clung on to the fact inflation fell nevertheless but that proved a too-weak argument in a sell-on-upticks market. The Nasdaq again underperformed (-3.18%). US bond yields soared up to 12 bps shortly after the CPI release only to end up with +2.6 bps at the front. Yields on longer tenors even turned red, losing almost 8 bps at the very long end. The 10y lost the 3% mark. European/German yields initially joined the US move higher but here too things soon went in reverse. German Bund yields fell as much as 3.1 bps, European swap yields printed losses of more than double. This happened even as ECB’s Lagarde finally caved and hinted at a July rate hike. In this respect, EUR/USD’s performance was disappointing. Overall risk-off even pushed the pair marginally lower to 1.0512. The trade-weighted dollar index keeps knocking on the 104 door. Sterling was long an ocean of calm yesterday but came under pressure around the time US stocks started sliding. EUR/GBP rose from 0.855 to 0.858. GPB/USD closed at 1.225, the weakest level since May 2020.
•          Asian stocks lose 1-3% this morning on lingering inflation worries. Market news is limited. US bond yields extend their recent correction with 1.2 to 4.4 bps. Hong Kong intervened in its currency (see below). The Japanese yen outperforms. USD/JPY eases sub 130. EUR/USD is filling bids in the low 1.05 area.
•          US PPI and jobless claims on today’s eco calendar are worth mentioning but we don’t expect them to influence markets. Yesterday’s moves on core bond markets suggest we may have entered a period of consolidation, correction perhaps, where growth worries take over from the tightening/inflation narrative. First support in the US 10y is situated at 2.83% but the crucial one is located around 2.72%. Germany’s 10y is losing the 1% support with the next reference around 0.80% (2018 top). If uncertainty about the eco outlook indeed becomes the dominant theme, it’ll be difficult for EUR/USD to escape the gravitational pull from 1.05. Sterling extends yesterday’s losses after Q1 GDP growth came in lower than expected at 0.8% q/q while the cost-of-living crisis suggests no improvement for the coming quarters. UK Finance minister Sunak is said to provide more relief in August but that may be too little too late. EUR/GBP surpasses 0.86 resistance (Nov/Dec 2021 correction highs).

News Headlines

•          The Hong Kong Monetary Authority (HKMA) intervened in the currency market to prevent the HK dollar from weakening beyond the allowed USD/HKD 7.75 to 7.85 trading band. The HKMA bought HKD 1.586 bln. The peg of the Hong Kong dollar with the US dollar is under pressure due to rising US yields/interest differential between US and Hong Kong money market rates. Interventions aim to drain liquidity from the local market to raise local money market rates. It was the first time since early 2019 that HKMA had to intervene in the currency market to support the local currency. In October 2020 it last intervened to prevent the HKD from strengthening outside the allowed bond. USD/HKD still trades near 7.85.
•          According the a report in the Financial times, Turkish authorities are raising pressure on local bank to limit corporate clients from buying foreign currency against the Turkish lira in order to prevent a further weakening of the local currency. According to the article, banks have to seek approval from the central bank for bigger amounts of FX purchases.  Since the start of the year, the Turkish lira has traded relatively stable even as combination of elevated inflation (69.97% Y/Y in April) and a low policy rate (14%) leave the currency with a deeply negative real interest rate. However, over the previous days, the lira again showed tentative signs of weakening with EUR/TRY rising to 16.23, compared to levels around EUR/TRY 15.53 end last month.


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 out. Inflation expectations, while stile high, are correcting lower from record highs. The jury is still out, but a correction in nominal yields may be in the making. 0.80% serves as first resistance.

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. But the recent yield surge this caused as markets adjusted, has eased recently. Yields may be entering a period of consolidation. Important support is located at 2.72%.

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 concretize 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.
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This document is only valid during a very  limited period of time, due to rapidly changing market conditions.

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