Wednesday, 13 July 2022
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•          Core bond yields in Europe closed at or slightly below key support levels yesterday. For Germany’s 10y reference (-11.4 bps, 1.13%), this meant the 1.12%/1.15% area. Other changes ranged from -8.7 bps to 13.1 bps, flattening the curve. European swap yields lost between 8.4 bps and 12.5 bps with the 10y having finished below 1.99% (23.6% retracement of the March 2020 – June 2022 uptrend). US Treasuries underperformed, paring some gains after a mediocre US 10y auction that tailed and produced the weakest demand since 2020. A US CPI report (officially due today) showing that inflation reached 10.2% in June also weighed on bonds. The Bureau of Labor Statistics later dismissed the release as a forgery but it nevertheless put markets on edge. US bond yields inched 1.3 bps to 3.8 bps lower with the belly of the curve outperforming wings. FX markets were constantly eyeballing EUR/USD. The pair tested parity in European dealings after which technical return action higher kicked in. The combination eventually ended the day almost unchanged at 1.0037. The trade-weighted DXY rose a bit further beyond 108 though off intraday highs. EUR/GBP finished flat at 0.844. Japan’s yen and the Swiss franc remained the better bid ones with (equity) sentiment still fragile. European stocks were able to ditch the red for a close in the green (0.44%) but Wall Street ended about 1% lower (Nasdaq). Brent oil closed without triple digits for the first time since April.

•          Asian markets were served a double central bank meeting (see headlines below). Stocks are digesting it well, rising in most cases somewhere between 0.2-1.5%. Currency markets are inconclusive. GPB, CAD (ahead of a super-sized 75 bps hike?!) and AUD slightly outperform peers, JPY lags. EUR/USD sticks around 1.003. Core bonds trade sideways in the run-up to the (real) CPI release. Consensus is for a further rise in the June headline figure from 8.6% to 8.8% via a strong 1.1% m/m increase. Core inflation should ease further from 6% to 5.7% (0.5% m/m). Persistently high inflation and a bold Fed is what kept US real yields – contrary to Europe – afloat in recent weeks. But given the current growth mindset in markets, we think it’ll take a major upward surprise to rekindle the upward momentum for markets to price in even more Fed action than they currently do. It may however put a more solid bottom below US yields than in Europe, bringing another round of UST underperformance. We therefore don’t expect the dollar to backtrack anytime soon either. EUR/USD remains in danger of breaking below parity with next references at 0.96 and 0.823. A bounce back north of 1.035 is needed to call off the immediate downside alert but as long as the energy/natural gas story is running, we consider this unlikely. Sterling this morning profits from a batch of better-than-expected industrial data. EUR/GBP edges lower towards 0.842, the lowest level since mid-May.

News Headlines

•          The Bank of Korea as expected to stepped up the pace of its rate hikes from 25 bps to 50 bps, bringing its policy rate (7-day repo rate) to 2.25%. At 6.0% Y/Y in June (core 4.4%), inflation remains well above the 2% target. The BOK forecasted that CPI will remain high at 6%+ (core 4%+) for some time and run substantially above the May forecast of 4.5% for the year overall. But growth will probably stay below the 2.7% forecast. BOK governor Rhee Chang-yuong said at the news conference that it is likely to be appropriate to return to a pace of 25 bps rate hikes going forward. The market view for the policy rate to reach 2.75%/3.0% by the end of the year was ‘reasonable’. The Korean won this morning trades slightly stronger at USD/KR 1304, but remains close to yesterday’s cycle low of 1316.

•          The Reserve Bank of New Zealand today raised the cash rate by 50 bps to 2.50%. The move was widely expected. Tightening is warranted as ‘spending and investment demand continues to outstrip supply capacity, with a broad range of indicators highlighting pervasive inflation pressures. Employment remains above its maximum sustainable level and the Reserve Bank’s core inflation measures are around 4 percent’. Even as the RBNZ sees downside risks to growth, it is is comfortable with the OCR path outlined in the recent May Monetary Policy Statement. The RBNZ then projected the policy rate near 3.50% at the end of the year to reach a peak near 4.0% next year. The Kiwi dollar, which was under pressure from broad dollar strength of late, is trading little changed in the NZD/USD 0.6125 area.


The ECB turned the corner in its inflation narrative. The central bank ended net asset purchases, facilitating rate hikes from this month. Real yields took over from inflation expectations, pushing the German 10-yr yield to its highest level since early 2014. The move ran into resistance at 1.9% (50% retracement on long term decline) before correcting lower. First important support at 1.18%/1.15% is tested on recession fears, but survived.

The Fed started tightening and published an aggressive blueprint for the remainder of the year. A second 75 bps rate hike in July is likely. Quantitative tightening will hit max speed by September. Markets discounted a good deal already and general focus has shifted more towards implications for growth currently. The 2.72% area was tested but didn’t break. Sideways consolidation is in the cards.

The euro zone is in (energy) crisis mode and markets ponder the ECB’s wiggle room to deliver rate hikes even with inflation being sky high. Growing recession fears hammered EUR/USD below the 2017 low of 1.0341. Parity is being tested. A break lower paves the way towards intermediate support around 0.96 before a return to the all-time low of 0.823.

The BoE in June signaled it might step up tightening. Initially this didn’t help sterling. However, a combination of euro weakness, PM Johnson leaving, the sharp correction in the oil price and the BoE reiterating its anti-inflation commitment, finally triggered a sterling short squeeze, pushing EUR/GBP below the established uptrend.

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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