Wednesday, 12 July 2023
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•          The up-move in US yields took a breather this week. Friday’s slightly softer than expected payrolls probably don’t change the Fed’s assessment on further tightening. However, with key resistance ahead (5.10% area 2-y; 4.09% area 10-y yield) it was time for bond shorters to reduce positions. On Monday, the NY Fed Survey on consumer expectations indicated that short term inflation expectations continued to fall 3.8% in June (from 4.1%). This might have accelerated the correction in yields going into today’s US June CPI release. US yields yesterday again ceded between 0.6 bps (5-y) and 2.5 bps (30-y). At the same time, European yields didn’t follow the setback in the US. German yields added between 0.9 bps (10-y) and 2.7 bps (2-y). At 3.32%, the German 2-y yield is closing in on the March top (3.38%). The 10-y yield is holding in the 2.65% area. The softening in US yields this time again supported a return higher in US and European equities. The S&P 500 and the Eurostoxx 50 gained about 0.7%. Brent oil ($79.5 p/b) cleared the $78 resistance, but for now this apparently isn’t a huge source of concern for (global) markets.
On FX markets, the dollar continued to fight an uphill battle. This loss of momentum partially can be explained from softer US yields and a better risk sentiment post-payrolls . However, the US currency last week also failed to profit from a set of strong US eco data. EUR/USD closed at 1.101, nearing the June 22 top, the last hurdle for a retest of the 1.1095 YTD top. DXY yesterday closed at 101.73 to be compared with a ST top at 103.57 touched last week. The yen is also building an impressive comeback (USD/JPYU close 140.36, EUR/JPY 154.18). Sterling yesterday profited from a solid UK labour market report. The unemployment rate rose from 3.8% tot 4.0% and the June payrolls growth slightly disappointed. However, the 3M job growth to May (102 k) and especially higher than expected wage growth (7.3% Y/Y ex-bonus) is keeping pressure on the BoE to act decisively. The UK 2-y yield (5.42%, +5.6 bps) is holding near the cycle peak. Sterling fully profited with EUR/GBP (close 0.8512) at risk of sustainably breaking the 0.8518 YTD low.

•          This morning, Asian equities are trading mixed. The dollar stays in the defensive (DXY 101.42, EUR/USD 1.103). The yen continues its outperformance (USD/JPY 139.5). Later today, the Bank of Canada policy decision (25 bps hike to 5.0% expected) and the Fed Beige Book are interesting, but the market focus is on the US June CPI. Headline inflation is expected to decline from 4.0% to 3.1%. Core might ease to 5.0% from 5.3%. Despite the Fed recently indicating a likely further tightening, the ST market dynamics apparently hopes that a softer figure might reopen the debate on the amount of Fed tightening. We hold to the view that core inflation over time with justify the higher for longer paradigm. However, a softer than expected June figure still might extended the post-payrolls dynamics (‘technical correction’) in US yields in the dollar. The EUR/USD 1.1095 top might come on the horizon.

News Headlines

•          The Reserve Bank of New Zealand as expected kept the policy rate steady at 5.5%. Spending and inflation pressure are being constrained by the level of interest rates, but policy will need to be restrictive for the foreseeable future to ensure inflation returns to the 1-3% target range. Price pressures retreated from a 22-year high of 7.3% in 2022Q2 to a still much too high 6.7% in 2023Q1. Employment remains above its maximum sustainable level but the RBNZ is seeing signs of labour market pressures dissipating. Businesses meanwhile are reporting slower demand, including from abroad, and weak investment intentions. Domestic spending has eased but the ongoing recovery in tourism spending is supporting aggregate demand. The central bank left no clues for any potential further tightening. Instead it hinted at reaching the peak as projected by the May forecasts, provided inflation eases as expected. New Zealand money markets now see a stable rate through 2024Q2. The kiwi dollar quickly recovered from a kneejerk downleg to trade higher against a generally weak USD. NZD/USD trades comfortably above 0.62(2).

•          Hungary’s central bank deputy governor Virag in an interview with Inforadio yesterday said the MNB plans to stick to its 100 bps/month cut of the emergency rate, which currently stands at 16%. The cautious approach is needed to preserve forint stability, which is also critical in the fight against inflation. Virag expects price pressures to slow “on a very steep path until the end of the year” with single digits possible already in the autumn. The Hungarian currency since July had a bad run with EUR/HUF nearing the 390 barrier Friday last week. Since then, a US payrolls induced turnaround kicked in, with the pair currently trading around 378 again.


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 an, we expect a solid bottom with a potential return to the cycle top.

The Fed skipped a rate rise in June but the dot plot suggests two more to come this year with a first move due in July. A pause allows for more evidence on the pass-through of the previous tightening and on the regional bank implosion. The hikes pencilled in signal readiness to act against still elevated inflation and an unexpectedly strong labour market and economy. Yields rebounded and are testing the March top.

The Fed’s awkward pause, even as it is followed by more hikes, marks a stark contrast with the ECB’s ongoing decisiveness. EUR/USD overcame several ST resistance levels including 1.0942 (50% recovery on 2021-2022 decline). This week, USD softness even brought to pair above the 1.10 area, opening the way for a retest of the 1.1095 YTD top.

The BoE’s conditional rate hike approach comes back to haunt them after April and May CPI delivered a nasty surprise and the labour market remained red hot. Money markets expect several more rate hikes, pushing sterling to a new YtD high. Short-term momentum in sterling improved, but we stay cautious MLT. Divergency within the BoE about the way forward still might change sentiment further out.

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). Read the full disclaimer.

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