Tuesday, 13 December 2022
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•          European and American stocks parted ways yesterday. The former closed half a percent lower in choppy trading (EuroStoxx50) as investors eye the impact on power markets from this winter’s first real cold snap. Wall Street finished up to 1.58% higher (DJI) with some pointing to the NY Fed inflation survey (see below) serving as a catalyst. But this doesn’t dovetail with the uptick in yields occurring around the same time. The US auctioned $40bn 3-y and $32bn 10-y auction notes. The former went well but the latter tailed by almost 4 bps. It reinforced the ongoing advance in US yields with net changes ranging between 2 and 3.5 bps in the 2y/10y bucket. Germany’s yield curve inversion deepened, seeing +3.7 bps at the front and -2.9 bps at the longest tenor. The dollar was slightly stronger in general but so was the euro. EUR/USD as a result closed unchanged around 1.053. Japan’s yen underperformed. USD/JPY rose from 136.36 to 137.67. EUR/JPY topped 145, coming from 143.79. Sterling had another decent run. EUR/GBP continues to hover near key support at 0.856/7. Economic data contained an industrial update (IP, manufacturing production, construction) which overall topped estimates.
•          Hong Kong relaxed some more Covid restrictions, amongst others scrapping a ban on international arrivals going to bars or eating at restaurants. It’s part of China’s rapid shift away from its economically damaging zero-Covid strategy. HK bourses are among the better performers during Asian trading hours this morning, although gains of about 1.3% were halved in the meantime. Core bonds eke out a slight gain, resulting in a 1 bp decline in UST cash markets currently. The dollar loses a few ticks in generally subdued trading.
•          Tight trading ranges suggest markets adopted a holding pattern as they await the outcome of today’s US CPI (November). It is the final critical data the Fed gets as it kicks of its two-day meeting later today. Consensus expects headline inflation to come in at 0.3% m/m and settle at 7.3% y/y, down from 7.7% the month before. Core inflation should ease from 6.3% to 6.1% y/y (0.3% m/m). We hold a neutral view on the actual outcome but expect an asymmetrical market reaction where a downside surprise is likely to cement rate cut bets and trigger an equity and core bond/US Treasury surge. Resistance in EUR/USD at 1.0611 (38.2% recovery of the 2021-2022 decline) would surely be tested. This would raise the stakes going in to the Fed decision as we expect chair Powell to push back against such market pricing. The British economic update continues with the October labour market report surpassing expectations on all accounts. Sterling in a first reaction ekes out a small gain.

News Headlines

•          The EU and Hungary reached a way out of their stalemate ahead of the EU Summit at the end of the week. Hungary yesterday dropped its veto against the implementation of an EU-wide minimum effective corporate tax rate (15%) and against an €18bn funding package for Ukraine. As a quid pro quo, the EU will conditionally approve the country’s €5.8bn Covid recovery plan. Member states also agreed to freeze €6.3bn of cohesion funding (instead of €7.5bn earlier proposed). Rule of law reform requirements will be integrated in Hungary’s recovery plan so that the country only really gets access to the money once all conditions are met. The forint gained some ground yesterday in the run-up to the decisions, with EUR/HUF down to 415 from 420. It’s too early for a big forint relief rally as long as the country doesn’t get the necessary funding.
•          The NY Fed household survey yesterday showed that inflation expectations decreased in November at both the 1y (from 5.9% to 5.2%), 3y (from 3.1% to 3%) and 5y (from 2.4% to 2.3%) horizons. Home price growth expectations continued to decline. Labor market expectations strengthened, while household income growth expectations increased to a new series high. Mean unemployment expectations—or the mean probability that the US unemployment rate will be higher one year from now—decreased by 0.7 percentage points to 42.2%.


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. But 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 elevated 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 too aggressive. EUR/GBP remains near key support at 0.8559/67.

Calendar & Table

Note: All times and dates are CET. More reports are available at KBCEconomics.be 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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