Wednesday, 13 September 2022
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•          US Treasuries underperformed German Bunds yesterday. US yields added 1.4 bps to 6.5 bps with the 10-30yr bucket being worse off. The main move occurred in the wake of a very weak $32bn 10-yr Note auction which stopped nearly 3 bps through the WI bid with a below-average bid cover. The $41bn 3-yr Note auction tailed as well, but only 1.4 bps while the bid cover was in line with average. The auction results are telling about medium-term risks for a continuation of the sell-off given that weak demand comes at a time when we’ve arrived at the highest (absolute) US yield levels in over 15 years at the front end of the curve and as we’re nearing YTD highs (which are multi-year highs as well) at the longer tenors.
•          The German yield curve bull flattened. German yields fell by 0.6 bps (2-yr) to 5.8 bps (30-yr). The prolonged correction of gas prices, advances made by the Ukrainian army and the accompanying  risk rebound (>+2%) all contributed to the move. It added to the single currency’s revival which intraday tried to escape the downward trend channel against the dollar in place since February. EUR/USD set an intraday top at 1.02 but closed 1.0122. EUR/GBP tested the multiyear top at 0.8721 before closing at 0.8664.
•          US CPI inflation is today’s main dish. Consensus expects a second consecutive decline in the headline Y/Y number, from 8.5% to 8.1%. A double digit decline in fuel prices is the main culprit. The same effect will likely play in September as well. Core inflation on the other hand is set to increase further in coming months with owners’ equivalent rent being one of the strongest drivers. Consensus expects an increase from 5.9% Y/Y to 6.1% Y/Y. The dynamic in services inflation isn’t going to slowdown neither. From a market point of view, we might arrive at the point where the decelerating headline number could be sufficient to square some positions on bond markets. FX and stock markets already started correcting on ruling trends over the past sessions. Yesterday’s NY Fed’s monthly survey (see below) could be interpreted in the same way. The Fed’s blackout period kicked in, creating a vacuum going into next week’s policy meeting. Another 75 bps rate hike is granted, but how will the Fed’s new inflation forecasts look like and even more importantly their plans for next year (in the new dot plot)? Money markets currently discount a policy rate peak of 4% which we still believe to be too conservative, strengthening our medium bias of more weakness in core bonds despite the possibility of some short term relief.

News Headlines

•          US consumer three-year ahead inflation expectations eased for a fourth straight month, the NY Fed’s monthly survey revealed. The outlook for price gains fell from 3.2% in July to 2.8% in August. This compares to the peak seen in September and October last year of 4.2%. One-year ahead expectations declined to 5.7% from 6.2% in July while those for a five-year horizon eased to 2% (down from 2.3%). Gas prices are seen unchanged next year. Food and rents are still expected to rise, though at a slightly lesser pace of 5.8% (-0.8 ppts) and 9.6% (-0.3 ppts). Consumers think home prices will still increase but with no more than 2.1% – a sharp drop of 1.4 ppts from the month before and the slowest rate since July 2020.
•          The Czech government yesterday approved a plan at a special meeting to cap prices of electricity and natural gas for households and small businesses. Finance minister Stanjura said the government was planning to do so during a debate on public TV on Sunday. The price limit is set at CZK 6/MWh for electricity and half that for gas. Public institutions including hospitals and schools will enjoy the new legislation too while the government is preparing a solution for large enterprises, prime minister Fiala said. The estimated budget impact amounts to CZK 130bn, to be paid for by a windfall tax, dividends from state-owned or state-controlled companies and revenue from carbon credits. The draft law approved on Monday must now be passed by both chambers of parliament.


The ECB ended net asset purchases and lifted rates with a 50 bps inaugural hike and a 75 bps follow-up move. More tightening is underway but the ECB refrained from guiding markets on the size of future hikes. Germany’s 10-yr yield broke out of the corrective downward trend channel since mid-June, suggesting more upside. The YTD high at 1.93% comes into play.

The Fed hiked to neutral by a back-to-back 75 bps in July. The size of future moves depends on the incoming data. QT hits max speed. The 10y briefly dropped below the lower bound (2.70% area) of the sideways trading range, but a sustained break lower was averted. The focus is back central bank frontloading to tackle inflation.

EUR/USD is in a strong downward trend channel since February. Last week’s hawkish ECB meeting, attempts to tackle the energy crisis and a risk rebound gathered some euro-momentum. The upper bound of the downward trend channel kicks in a first resistance around 1.0150.

The Bank of England hiked by 50 bps in august. More hikes are coming but are priced in already. Combined with the BoE’s grim economic assessment it triggered a profit-taking move. EUR/GBP broke out of the corrective downward trend channel since mid-June and is about to test the YTD high at 0.8721

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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