Friday, 14 July 2022
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•          The post-payrolls/CPI bond market rally continued yesterday and reinforced existing trends in most other markets. The minutes of the June ECB meeting showed a strong commitment to continue the campaign to eradicate inflation. A 25 bps July rate hike is a certainty with probably more follow-up action to come as the MPC stays attentive to persistent high core inflation. Bunds added substantial gains early in the session, but then shifted to consolidation modus. In the end, German yields lost between 9.3 bps (10-y) and 6.2 bps (30-y). After the recent setback (in yields) maybe it’s time for some technical levels to come in play. For the 2-y German yield, the 3.03% end July low is a first reference. Further out on the curve, there’s little reason for the 10-y Bund yield to sustainably trade below the 2.5% barrier (close yesterday at 2.485%). US data were mixed with final demand PPI dropping more than expected to 0.1% Y/Y. US jobless claims declined to 237k, indicating that the early June uptick shouldn’t be considered as a pointer of a genuine easing of labour market conditions. The bond rally briefly slowed after the claims release, but US yields still lost between 12.6 bps (5-y) and 4.6 bps (30-y ) in a daily perspective. The 2-y yield (4.64%) now fully retraced the acceleration that started end June. The 10-y yield (3.77%) is somewhat above the 3.7% ST support area that put a floor end June. Overnight, Fed Waller indicated that he still expects the Fed to raise rates twice this year even as a September rate hike will depend on the two inflation reports that will be available by then. Fed Daly took a more neutral stance, but also said that it’s too early to declare victory on inflation. The bond rally further propelled risk assets. The EuroStoxx 50 added 0.72%. Intraday, it tested again the 4400 level. US indices gained between 0.14% (Dow) and 1.58% (Nasdaq). Even cyclical commodities like copper and oil extended recent gains. The dollar was the main victim of investor anticipation on the (potential) end of the Fed hiking cycle. DXY (close 99.77) further dropped below the key 100.86 key neckline unravelling the technical picture. EUR/USD (close 1.1226) vigorously extended its leap beyond the previous YTD top of 1.1095. The yen declined further against the dollar (close USD/JPY 138.5), but lost against the euro (close 154,99). Sterling gained mildly but at 0.8546, EUR/GBP stayed away from the 0.85 big figure/support area.
•          Asian equities this morning show limited gains as the risk rally slows. US yields don’t decline any further. The dollar still struggles to avoid additional losses (DXY 99.73, EUR/USD 1.122). The eco calendar is thin today. In the US, Consumer Confidence of the University of Michigan deserves some attention, both for the headline figure (expected at 65.5 from 64.4) as well as for the inflation expectations series. On bond markets we see room for some end of week consolidation/profit talking. The technical picture suggests an ongoing uphill battle for the dollar.

News Headlines

•          Hungary is thinking of issuing short-term euro- and USD-denominated debt, with a maturity less than one year, the AKK debt agency announced on its website. Short-dated dollar bond buybacks at the beginning of the year has reduced the annual amount of foreign currency bond maturities to a record low level in the following years. It has set up a Euro Commercial Paper plan under which it is able to issue as much as €1bn. The new programme allows for a cost-efficient liquidity management and diversifies the investor base, AKK said.
•          Exit RBA governor Philip Lowe, enter Michele Bullock. Australia’s treasurer Palmers announced Bullock as the new head of the Reserve Bank of Australia. She’s the first woman to take over the helm on September 18 this year. Bullock is seen as the continuity candidate. Although the current deputy governor has a slightly more dovish signature compared to Lowe, there are no major implications expected for monetary policy going forward. Under Lowe, the RBA tightened policy rates by 400 bps to 4.1% since May 2022 to fight inflation. This aggressive campaign drew criticism as it followed a sharp U-turn on previous guidance that rates wouldn’t rise before 2024. The Aussie dollar shrugged at the decision to replace Lowe by Bullock. AUD/USD trades unchanged around 0.688. In other central bank position switch news, the Fed’s most outspoken hawk James Bullard (St. Louis) is resigning to pursue an academic career. Bullard was the first to call for an aggressive tightening campaign, recognizing the inflation threat. His views often turned reality, making him an influential voice. This year, however, he doesn’t vote on policy..


The ECB adopted a more gradual approach by slowing its tightening pace from 50 to 25 bps in May. It stated that in the base scenario rates will be brought to sufficiently restrictive levels (i.e. more hikes to follow) and will stay there for as long as necessary. Combined with APP reinvestments fully stopping from 2023H2 on we expect a solid bottom with a potential return to the cycle top, even after recent US-driven bond rally .

The Fed skipped a rate rise in June but the dot plot suggests two more to come this year with a first move due in July. A pause allows for more evidence on the pass-through of the previous tightening and on the regional bank implosion. The hikes pencilled in signal readiness to act against still elevated inflation and an ongoing tight labour market and economy. The rebound in yields ran into resistance after softer June payrolls and June CPI .

The Fed’s awkward pause, even as it is followed by more hikes, marks a stark contrast with the ECB’s ongoing decisiveness. EUR/USD overcame several ST resistance levels and even jumped beyond the 1.1095 YTD top post US CPI. EUR/USD 1.1274 (76% retracement since early 2021 top to 0.9536 cycle low) is the next reference.

The BoE’s conditional rate hike approach comes back to haunt them after April and May CPI delivered a nasty surprise and the labour market remained red hot. Money markets expect several more rate hikes, pushing sterling to a new YtD high. Short-term momentum in sterling improved, but we stay cautious MLT. Divergency within the BoE about the way forward might still change sentiment further out.

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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