Tuesday, 14 March 2023
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•          Yesterday, the sharp ‘post-SVB’ repositioning, especially on interest rates markets, continued unabatedly even as US authorities during the weekend took measures to protect depositors and facilitated more easy refinancing for banks that face negative asset valuations due to the global rise in yields/inversion of the yield curves. However, in a first reaction, it didn’t help to prevent investors from scaling back exposure to the financial sector inside and outside the US. This outflow triggered a further run to safe haven assets. Especially US short term yields again tumbled sharply (2-y closed at 4.19%, minus 61 bpn) in a steeping move. Declines further out were more modest (10-y minus 12.5 bps). The 30-y even closed little changed (0.3 bps). The US 10-y real yield again lost about 8.5 bps. Money markets now only discount one additional Fed rate hike this month or at the May meeting. German yields showed a similar picture tumbling between 40.7 bps (2-y ) and 9.6 bps (30-y). Declines in EMU swap yields were more modest (from -24.3 bps to -9.6 bps) suggesting that at least part of move was due to safe haven flows and not fully the result of a change in expectations on ECB policy going forward. Markets see about a 50/50 chance between a 25 and a 50 bps ECB rate hike this week and a peak policy rate in the 3.25/3.50% area. Even despite recent turmoil, we don’t see a strong case for the ECB to deviate from its 50 bps guidance. The Euro Stoxx 50 still lost more than 3.0%. US indices finally entered calmer waters (Dow -0.28%, Nasdaq +0.45%). The dollar underperformed the other majors (close EUR/USD 1.0731, USD/JPY 133,21, DXY 103.60). Sterling outperformed as UK short-term yields declined less compared to the US or EMU (EUR/GBP close 0.881).

•          The risk-off continues in Asia with Japan (Topix -2.7%) and Korea underperforming and China outperforming (CSI 300 -0.25%). Japanese yields also dropped sharply (10-y at 0.28% vs still testing the 0.50% barrier early Friday). 2-y US Treasuries still trade extremely volatile (currently little changed, initially +20 bps). The dollar regains a few ticks (EUR/USD 1.07, USD/JPY 133.55). Later today, the US February CPI will be released. Until recently it was supposed to provide decisive guidance on whether the Fed should raise rates next week by 25 or 50 bps. Both for core and headline CPI a monthly rise of 0.4% is expected. Headline Y/Y CPI is expected to ease to 6.0% (from 6.4%). Core is expected to decline only marginally (5.5% from 5.6%). Financial stability probably will prevail as a driver for markets. Even so, especially in case of a CPI in line or above expectations, the Fed is at risk of facing another credibility issue if it would abruptly call an end to its anti-inflation campaign. In current environment, higher than expected inflation highlighting the need for more tightening, won’t be good news for risk assets. Even in case of a countermove/ rebound in short-term US yields, will doubt it will be a big support for the dollar. UK labour market data this morning were solid (monthly payrolls + 90k; employment rate 3.7%, Average weekly earnings +5.7%). EUR/GBP is slipping below the 0.88 big figure.

News Headlines

•          China has taken another step in returning to pre-Covid normality. It will reopen its borders to foreign tourists for the first time since the outbreak by restoring the issuance of all types of visas from tomorrow on. It’s the last cross-border control measure that was in place and should help boost tourism and growth by removing it. In 2022 some 116 million cross-borders trips were made in and out China with foreigners accounting for only 4.5 million. In 2019, before Covid arrived, 670 million trips were registered with almost 100 million coming on the account of foreigners. China’s new premier Li Qiang hailed China’s less than two months “smooth transition” from zero-Covid to normality. USD/CNY this morning gains slightly, mainly as the dollar regained a bid after selling of for two days. The pair trades around 6.87.

•          Euro area finance ministers on Monday backed last week’s recommendation of the Commission to start tightening fiscal policy. They said that while there is uncertainty surrounding the outlook, risks to growth appear more balanced than previously. In a context of high inflation and tighter financing conditions, they added that broad-based fiscal stimulus to aggregate demand is not warranted. Instead member states should pursue prudent fiscal policies over 2023-2024 aimed at ensuring medium-term debt sustainability.


The ECB flagged another 50 bps rate hike in March. This clear prioritization to combat inflation initially failed to push the 10-y Bund to the cycle top north of 2.50%. A batch of strong data served as a global wake-up call. The 10-y yield was hurled to new cycle highs as markets further adjusted ECB rate expectations to 4.0%. After touching a cycle top near 2.75%, the SVB risk-off aborted the uptrend with German 10-y yield testing the 2.20% area.

December dots confirmed the Fed’s intention to raise the policy rate north of 5% and to keep it above neutral over the policy horizon. Markets refused to follow this guidance up until the wake-up call coming from strong Jan & Feb eco data. The US 10-yr yield temporary surpassed of 4%, but the safe haven bids due to the SVP collapse trigger a sharp reset back in the previous 3.30%/3.90% trading range.

USD lost momentum in Q4. EUR/USD left a downtrend channel improving the technical picture. The euro received support from the ECB’s hawkish twist, lower energy prices and a risk-on sentiment. The pair tested 1.10, but a break failed with the dollar regaining momentum post strong US January/February data. A EUR/USD decline below 1.0735/1.0656 support was aborted post-SVB.

The BoE raised its policy rate by 50 bps in February, but suggested that rates will peak after a final move in March. The UK central bank that way caused a yield disadvantage for sterling, which already has weak structural cards (weaker growth prospects, twin deficits, LT brexit consequences …). EUR/GBP for now avoided a return above 0.90 as UK eco data suggest that the BoE has more ground to cover as well.

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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