Thursday, 14 July 2022
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•          Faster than expected US inflation (9.1% y/y) once again sent shockwaves through financial markets yesterday. US bond yields shot up as much as 18 bps at the short end of the curve before paring some of that to 10.7 bps (2y) eventually. There’s a lot of market chatter for a 100 bps rate hike by the Fed later this month (given a 60% chance) instead of the earlier flagged back-to-back 75 bps. For Fed’s Bostic “everything is in play”. Mester said the CPI release meant there’s no reason for going smaller than last time. The BoC in any case set the tone (see below). With such a massive rate move also comes the idea of a recession. It led US yields from the 7y tenor on to ease a couple of bps (from 1.9 bps to 4.3 bps). European yields rose in sympathy with the US. Germany added 10.3 bps at the front end while shedding 2.6 bps at the long (30y) tenors. The swap curve flattened as well though by less (2y +6.1 bps). Wall Street reacted negatively with a -1.5% at the open yet a mere -0.5% in the close. The US dollar strengthened shortly after the CPI release but didn’t hold on to those gains. The DXY index eased to below 108. EUR/USD briefly dipped below parity before “recovering” to 1.006. USD/JPY closed near cycle/multi-decade highs (137.39). Sterling briefly jumped to EUR/GBP 0.84 following better-than-expected industrial data and monthly GDP figures. The pair closed around 0.846.

•          Another double dose of central banks in Asian-Pacific dealings with both the Philippines and Singapore tightening policy (by more than expected). Stocks do well nonetheless. Core bonds trade with a downward bias (US cash yields up to 4.6 bps higher). Australian yields jump and the Aussie dollar profits from strong data (cfr. infra). The US dollar remains well bid and the yen trades in the defensive ahead of a meagre eco calendar containing US PPI and weekly jobless claims. The European Commission’s summer forecasts are due. A draft seen by Bloomberg showed the euro area economy growing 2.6% this year (-0.1 ppt) and just 1.4% next near (-0.9 ppts) as surging prices crimp demand and potential winder energy shortages weighs on confidence. Inflation is seen at 7.6% this year and 4% the next (+1.5 ppts and 1.3 ppts respectively). It highlights the difficult context for the continent and its currency. We continue to err on the side of caution with respect to EUR/USD. The pair is again drawn to parity this morning. For core bonds we’ll look whether (short-term) bond yields stick to their post-CPI gains. There’s new US data due tomorrow with retail sales and the U. of Michigan consumer confidence (which pushed the Fed in June into a 75 bps hike).

News Headlines

•          The Bank of Canada raised its policy rate by 100 bps to 2.5%. A 75 bps rate hike was expected. The BoC explained that by frontloading tightening it aims to avoid bigger hikes further down the road. The economy is in a situation of excess demand with a tight labour market and businesses passing on higher input and labour costs. This raises the risk that elevated inflation becomes entrenched. The BoC expects inflation to peak at 8.0% in the middle quarters of the year (7.2% average 2022). Inflation is expected to cool down to 3% by the end of next year and to return to 2% end 2024. More modest global growth and higher interest rates are expected to slow down Canadian growth from 3.5% this year to 1.75% next year and 2.5% in 2024. Rates will need to be raised further, complemented by quantitative tightening. The market now sees a peak in the BOC policy rate in the 3.50%/3.75% area by the end of the year. The Canadian dollar, which weakened to USD/CAD 1.3060 after the US CPI release, rebounded to close at 1.297.

•          Data from the Australian Bureau of Statistics showed that the labour market tightened sharply further in June. The unemployment rate dropped from 3.9% to 3.5%, the lowest level since 1974. Employment jumped 88 000 from May while only a rise of 30.000 was expected. The participation rate also improved further to 66.8%. The strong labour market data fueled market speculation that the RBA might be pushed to consider an ‘outsized’ 75 bps rate hike at the August 2 policy meeting. The 3-y yield jumped 14 bps to 3.01%. Gains in the Aussie dollar remain modest on overall USD strength. AUD/USD gained from 0.673 to 0.6775 currently.


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. Another inflation surprise raised the odds for a 100 bps hike in July instead of the flagged 75 bps one. QT will hit max speed by September. But markets discounted a good deal already and focus is at least as much on growth. The 2.72% area was tested but didn’t break. Sideways consolidation over the summer 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

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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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