Tuesday, 14 June 2022
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•          Last week’s aggressive repositioning simply continued and even intensified yesterday even as there were no data or official central bank communication. Initially, the rise in European yields outpaced the US. Later US bonds were captured in an outright free-fall. Press articles (WSJ) indicated that the Fed could step up the pace of rate hikes to 75 bps (or even more) already at this week’s meeting. Evidently, this is not the standard/preferred procedure outlined in CB ‘forward guidance’. Even so, with 75 bps hikes for this week and next month largely discounted, it might be difficult for the Fed not to further frontload tightening in the wake of last week’s inflation data. The US yield curve showed an impressive bear flattening with the 2-y yield jumping 29.1 bps, the 5-y 22.2 bps, the 10-y 20.4 bps and the 30-y still gaining 15.4 bps. Yields at all maturities up to 10-y are surpassed the 2018 top! The 10-y US real yield also jumped an unseen 30+ bps. German bonds also remained in sell-off modus with yields rising between 17.6 bps (2-y), 11.6 bps for the 10-y and 5.8 bps for the 30-y. The sharp rise in (real) yields also caused big collateral damage in many asset markets. US equities lost between 2.79% (Dow) and 4.68% (Nasdaq). The S&P dropped below the 38% retracement level of 2020/22 rally, entering bear market territory (>20% decline from top). The DXY USD index surpassed the 105 May top. The risk-off temporarily gave the yen some relief. However with USD/JPY closing (134.42) less than 1 big figure from the multidecade top, it hardly can be labeled as real outperformance. Recent rise in EMU yields still doesn’t help the euro with a further widening in peripheral spreads (10-y Italy +15 bps) an additional negative (EUR/USD close 1.0409). Sterling lost big against the dollar (cable YTD low close at 1.2134). The government’s proposal to unilaterally change the protocol (cfr infra) is an additional source of uncertainty. Even so, the damage for sterling could have been bigger with EUR/GBP’s rise again blocked just south of 0.86.

•          Today, German ZEW investor confidence is expected to improve/bottom out both for the expectations and the current situation measure, but it won’t be a game-changer for sentiment given recent market repositioning. US May PPI might further color the inflation debate. Even so, with further Fed frontloading for June and July largely discounted, we assume some consolidation as markets look forward to more concrete Fed guidance tomorrow. This might also slow the USD-rally. However, recent impressive rise in real yields probably gives solid downside protection for the US currency short-term as other CB’s including the ECB still have work to do to match the Fed credibility on inflation.

News Headlines

•          Czech National Bank member Benda told Lidove Noviny newspaper he thinks even an 0.75 bps rate increase (currently 5.75%) might be too little. Benda is on the hawkish side of the aisle and already called for a 100 bps rate hike at the previous CNB-meeting. It’s his final meeting before a dovish rotation on the CNB board. He believes credibility of the CNB is at stake which could trigger an unwanted weakening of the Czech Koruna. Outgoing CNB President Rusnok this weekend put the range of CNB option between +50 bps and +100 bps. The May inflation print last Friday added to market positioning for a profound rate hike. CPI accelerated by 1.8% M/M to 16% Y/Y. CZK holds firm despite the huge market sell-off, trading around EUR/CZK 24.70. Other CE currencies took a beating with EUR/PLN jumping from the 4.55 support area (to 4.65) and HUF recording an all-time low above EUR/HUF 400.

•          UK PM Johnson yesterday published the government’s proposal to fix the Northern Ireland Protocol. The bill still needs to pass UK Parliament. It claims to introduce durable solutions to fix four key issues with the Protocol (burdensome customs processes, inflexible regulation, tax and spend discrepancies, democratic governance issues) and remove unnecessary costs and paperwork for businesses. European brexit commissioner Sefcovic immediately threatened to restart legal proceedings against the UK for (wanting to) breach the substantive provisions of the Protocol as well as the good faith obligation under the Withdrawal Agreement (ie infringement procedure).


Real yields took over from inflation expectations in pushing the German 10-yr yield beyond long term resistance at 1.13% (2012 & 2013 bottoms) to 1.24% (38% retracement on 2008-2020 decline). The next technical reference are 1.9% (50% retracement) to 2.09% (2013 high). The ECB finally turned the corner in its inflation narrative. The central bank will end net asset purchases this month, facilitating rate hikes from July.

The Fed started its tightening cycle and published an aggressive blueprint for the remainder of the year. 50 bps rate hikes at the next meetings can be taken for granted. Quantitative tightening will hit max speed by September. After a small correction in May, anticipation on even faster Fed tightening pushed the 10-y yield above the 3.2% (YTD high)/3.26% (2018 high) resistance. Intermediate resistance comes in at 3.76% ahead of the 4.0%/4.27 area (2010/2008 top)

EUR/USD tested the 2017 low at 1.0341 which survived. The pair (temporarily) rebounded mainly as the broader dollar rally took a pause. However, the 1.0806 resistance still proved one step too far, even as the ECB formally announced to start hiking rates as inflation stays unacceptably high. A persistent risk-off supports the dollar again. The 1.0341 area is again on the radar.

The developing cost-of-living crisis seems to hit the UK economy first and the hardest. Weak economic data toughen the Bank of England’s dilemma in battling inflation with doubts filtering through in markets. Open division within the BoE and the limited room for further tightening pushed EUR/GBP towards 0.86. A sustained break would be a bad omen for sterling.

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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