Monday, 12 December 2022
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•          Friday’s session had some interesting features in store. European traders eyed the second voluntary TLTRO repayment opportunity. The amount totaled a little less than €450bn, topping the €296bn in November and bringing the remaining outstanding amount to around €1.3bn. In US dealings, a higher-than-expected PPI reading served as a reminder of sticky price pressures and traders focused on more resilient headline US consumer confidence (U. of Michigan) instead of a sub indicator showing 1-year inflation expectation unexpectedly easing. Core bond yields rebounded. German yields underperformed vs swaps, in line with one could expect following the TLTRO repayment. Yields rose between 9.1 to 11.3 bps with the long-end slightly underperforming the front. US yields added 3.8 bps (2y) to 12.9 bps (30y). In both areas, the 10y yield support at 1.77% and 3.42 (and even 3.55%) respectively thus survived the week. The dollar held a slight advantage over the euro. EUR/USD returned from close to but below 1.06 to 1.054. DXY (trade-weighted dollar) closed just below 105.01 (38.2% retracement of the 2021-2022 rally). Sterling was strong but we’ve seen little reason for it. EUR/GBP tested 0.8567 critical support for an umpteenth time but it lived to fight another day. The pair eventually closed at 0.8592. Cable (GBP/USD) eked out a slight gain to 1.2259. Equities finished mixed with 0.54% gains in Europe (Eurostoxx50) but up to 0.90% lower in the US (DJI).
•          The Asian session this morning is a dull one. Stocks slip in the wake of WS’s performance. Core bounds recoup a tad of Friday’s slide and the US dollar enjoys some safe haven flows. This risk-off/wait-and-see approach makes perfect sense at the start of a pivotal trading week. All major central banks, Fed, ECB and Bank of England, and some smaller ones hold their final policy meeting of the year. The former two publish new forecasts that will offer guidance on what to expect for 2023. The monetary festive kicks off on Wednesday with the Fed and we probably shouldn’t expect a lot of market zest in the run-up to it. Tomorrow’s US CPI reading and to a lesser extent UK CPI on Wednesday do serve as the last wildcards though. For today, the double $40bn 3-y and $32bn 10-y auction is worth watching to gauge investor appetite after the recent yield correction lower, especially on the long-end of the curve. But it won’t dramatically alter market positioning. Perhaps capturing less (market) attention, but let’s also watch commodity markets, especially gas and power prices. Europe is facing its first serious stress test with temperatures dropping well in subzero territory this week.

News Headlines

•          Rating agency Fitch confirmed the UK’s AA- rating while keeping the outlook negative. The latter reflects the UK's rising government debt and significant fiscal risks derived from the country’s weaker macroeconomic outlook primarily due to the severe energy shock. The UK economy will enter recession in 2H22 and contract by 1.2% in 2023. Short term government support will avoid a deeper recession and help a gentle (1.5%) recovery in 2024. Inflation is expected to average 9.1% this year, before gradually declining to 3.4% (avg) in 2024. Fitch projects that the general government deficit will remain high at 6.6% of GDP in 2022 and 6.9% in 2023, before declining to 5.1% in 2024, consistently remaining above the projected average deficits of 2.4% for the 'AA' median. The debt ratio is forecast to rise to 107% of GDP by 2024 and roughly stabilize at that level over the medium term. The UK is rated similarly by Moody’s (Aa3; negative) and one notch better at S&P (AA, negative).
•          Czech Industry Minister Sikela urged governments to agree on a temporary gas market correction mechanism ahead of tomorrow’s extraordinary EU Council on transport, telecommunications and energy. The current gas price cap proposal would kick in if European reference prices (Dutch TTF) hit €275 per megawatt hour and the gap between world prices is more than €58. In response to some countries wanting a more aggressive mechanism, the Czech government, who holds the EU’s rotating presidency, floated the idea of lowering the thresholds to €220 and €35 respectively. Other countries want a cautious approach to avoid endangering the security of supply.


The ECB ended net asset purchases and lifted rates by a combined 200 bps since the July meeting. More tightening is underway but the ECB refrained from guiding markets on the size of future hikes. Germany’s 10-yr yield rose to its highest level since 2011 (2.5%) before a correction kicked in. Losing the neckline of the double top formation at 1.95% calls for a return towards the 1.82%/1.77% support zone.

The Fed policy rate is expected to peak above 5% early 2023 and remain above neutral over the policy horizon. A below consensus CPI print strengthened the call to slow down the pace of the tightening cycle, triggering a strong correction. Recession fears now trump inflation worries. The move below the neckline of the double top formation at 3.91% gave more downside potential towards the June top (3.5%) and 50% retracement (3.42%).

USD for the largest part of this year profited from rising US (real) yields in a persistent risk-off context. EUR/USD left the strong downward trend channel since February as the current correction on bond markets caused turnarounds on FX and equity markets as well. Key resistance at 1.0341/50/68 gave away. The next zone is situated at 1.0611 first, followed by 1.0747/1.0806.

The UK government ditched lavish fiscal spending plans which sent sterling tumbling towards the EUR/GBP 0.90+ area. Yawning twin deficits and rising risk premia will continue to weigh on the UK currency longer term. The Bank of England stepped up its tightening with a 75 bps rate hike, but warned simultaneously that UK money market expectations about peak cycle are way too aggressive. EUR/GBP is testing key support at 0.8559/67.

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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