Friday, 12 May 2023
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•          A dovish global sentiment dominated trading in the run-up to the Bank of England meeting. The UK central bank as expected raised its policy rate by 0.25% to 4.5%. Two members out of nine still preferred to keep the policy rate unchanged. Recent stronger growth data, higher than expected inflation and a solid labour market fulfilled the BoE’s condition of ‘more persistent (inflationary) pressures’. Even more, the BoE raised its forecasts for growth and inflation while the unemployment rate will be lower for longer. The forward guidance on monetary policy hasn’t changed. The BoE still makes further rate hikes conditional on evidence of persistent inflationary pressures. The data revision and upside inflation risks provided a motive for markets to raise expectations on future interest rate hikes. However, this didn’t happen. UK yields dropped in line with broader markets between 9.9 bps (2-y) and 4.9 bps (30-y). The market still sees the BoE peak policy rate near 4.75% by the end of Summer. The improved eco outlook also didn’t prevent a profit taking move on the recent sterling rally. EUR/GBP jumped from the 0.8665 area just before the BoE rate decision to close at 0.8725. In the US and Europe, yields initially also were on a firm downward trajectory. The decline temporary accelerated as US jobless claims jumped to 264k (from 242k) and as US PPI printed softer than expected. However, momentum eased later in the session. US yields closed between 1 bp (2-y) and 5.8 bps (10-y) lower. German yields ceded between 3.4 bps (2-y) and 6.4 bps (30-y) even as the ECB consumer expectations survey showed a sharp rise in inflation expectations (5% from 4.6% for the year ahead).The dollar outperformed among FX majors (DXY close 102.5) with the yen a good second (USD/.JPY close 134.5, EUR/JPY 146.88). The euro fell to further profit taking against the greenback (EUR/USD close 1.0916).
•          Asian shares trade mixed this morning. US yields show a slightly downward bias. The dollar loses marginally (DXY 102, EUR/USD 1.0925). There are no important EMU data today. U. of Michigan consumer confidence is expected to ease to 63 from 63.5. However, the focus will be on the survey’s inflation expectations. A further decline might reaffirm markets recent dovish bias. However, after the recent decline, US yields are again coming closer to key support areas (e.g. 3.25%/3.30% area for the 10-y yield) which we don’t expect to be broken anytime soon. The euro is in correction modus. EUR/USD 1.0831 is first intermediate support on the charts. This morning, UK Q1 GDP was reported at 0.1% Q/Q, in line with expectations. Details were a bit mixed with consumption showing no growth (0.0%) but fixed capital formation rising 1.3% Q/Q. Sterling is losing a few ticks in a first reaction (EUR/GBP 0.873).

News Headlines

•          The US Federal Deposit Insurance Corporation came with a proposal yesterday to recover the losses incurred after rescuing Silicon Valley Bank and Signature Bank. A so-called “special assessment” implies that about 113 large banks whose assets total at least $50bn would pay more than 95% of the costs. It would mean a $15.8bn in extra fees. The idea is based on grounds that this almost $16bn of a $18.5bn total cost were due to coverage of deposit accounts larger than the $250k limit, and most of those accounts are held at large(r) banks. Banks with assets <$5bn wouldn’t not have to contribute. Payments are scheduled to begin from 2024Q2 and would be collected over a period of two years, though the timeframe may still change, depending on the eventual losses.

•          The Reserve Bank of New Zealand published its quarterly inflation expectations survey this morning. Respondents see prices averaging 2.79% over the next two years, down from 3.30% in Q1 and the 31-year high of 3.62% in 2022Q4. It means that medium-term inflation expectations have returned to within the RBNZ’s inflation target band. One-year ahead inflation is also seen lower, at 4.28% from 5.11% while long-term expectations fell marginally from 2.36% and 2.19% to 2.35% and 2.28% in a 5-year and 10-year horizon respectively. New Zealand swap yields fell after the release with losses of up to 14 bps at the front end of the curve. Money markets nevertheless expect the RBNZ still to hike one more time, to 5.50% from 5.25% in either May or July. The kiwi dollar lost territory, from NZD/USD 0.6298 to 0.6261 currently..


The ECB adopted a more gradual approach by slowing its tightening pace from 50 to 25 bps in May. It stated that in the base scenario rates will be brought to sufficiently restrictive levels (i.e. more hikes to follow) and will stay there for as long as necessary. Combined with APP reinvestments fully stopping from 2023H2 on, we expect a solid bottom below European/German yields.

The Fed hinted at a pause after delivering a 25 bps hike in May. The regional bank implosion is expected to additionally weigh on activity going forward. But elevated inflation ties the central bank’s hands in terms of rapid rate cuts. Markets disregard Fed guidance and expect the cutting cycle to start in 2023 H2 nonetheless. Short term yields remain near YtD lows. Longer tenors, including the 10-yr, suffer from recessionary fears. Support around 3.3% survived.

The euro profited from subsiding energy concerns and the ECB’s policy stance. Even as the latter downshifted the tightening pace, it retains a hawkish upper hand vs. the Fed. Combined with local financial stability concerns, a sustained dollar comeback is unlikely. The EUR/USD 1.1095 YtD high is a minor resistance currently preventing the couple a return to the next, real reference at 1.1274.

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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