Wednesday, 14 September 2022
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•          Yesterday’s August US CPI print took everyone by surprise. The hoped-for monthly decline because of lower fuel prices was countered by strong increases in for example shelter (0.7% M/M), new vehicles (0.8%) and transportation services (0.5%). Headline inflation came in at 0.1% M/M and 8.3% Y/Y (from 8.5% vs 8.1% expected), but core inflation accelerated by 0.6% M/M (!) to 6.3% Y/Y (from 5.9% vs 6.1% expected). The market reaction very much resembled the one following May US inflation numbers which eventually prompted the Fed to hike its policy rate by 75 bps in June instead of the flagged 50 bps even if Fed members were unable to message markets given their blackout period. Some contemplate a similar scenario for the September 21 meeting. A 75 bps rate hike was discounted ahead of inflation numbers, but some investors take the risk to err on the side of +100 bps. In any case, the Fed policy rate peak is now expected at 4.25% instead of 4% according to US money markets. The inflation shocker triggered a sell-off in core bonds and stocks. US Treasuries obviously underperformed. US yields added 4.9 bps (10-yr) to 18.5 bps (2-yr) with the very long end of the curve outperforming (30-yr -2.5 bps). The US 2-yr yield closed above 3.75% for the first time since November 2007. The US 10-yr yield  came within striking distance of the YTD high at 3.49%. Underlying dynamics showed the US real rate touching 1% for the first time since 2018. Apart from a brief spell at the end of 2018, we need to go back to 2011 to see similar levels. German yields added 4.8 bps (30-yr) to 9 bps (7-yr) with the belly of the curve underperforming the wings. US stock markets went into tailspin, recording losses between 4% for the Dow and S&P and 5% for Nasdaq. Main European indices gave away around 1.5% in the close, but are set to open lower this morning. The dollar ruled post-CPI with EUR/USD dropping from just below 1.02 to below parity, thereby ending a 2-day attempt to break out the ruling downward trend channel. EUR/GBP remains near, but below, key resistance at 0.8721.
•          The Japanese yen gains a big figure this morning after the Nikkei reported that the Bank of Japan conducted so-called rate checks in the FX market. Those are often considered a precursor for FX interventions. The report coincided with comments by FM Suzuki (“won’t rule out any response if trends in FX market continued”) and top currency official Kanda (“we won’t rule out any options in responding”). USD/JPY fell from 144.50 towards 143.50 this morning. Today’s eco calendar is empty apart from outdated EMU production numbers. The Belgian debt agency issues a new syndicated green bond (OLO 96 Apr2039). EC von der Leyen’s State of the Union will grab some attention as she’ll present the bloc’s energy-intervention proposal. After yesterday’s counter on three days of optimism, we don’t expect (European) markets to run away with it.

News Headlines

•          According to Bloomberg, US officials are considering to refill its emergency oil reserves when WTI crude prices dip below $80 a barrel. The move is aimed at preventing oil to collapse which could hurt domestic production of the commodity. It marks a stark contrast with the decision made back in March to release a historic 180 million barrels over time to dampen the price surge after Russia’s invasion. Strategic reserves are at the lowest level since 1984 following the biggest drawdown on record last week. WTI crude rebounded to $87.31 after the report.
•          The Canadian government announced a C$4.5bn relief package aimed at supporting low-income families against high inflation. Measures include doubling a quarterly tax relief for individuals and families with low and modest incomes and a C$500 one-off top-up housing benefit for low earners who need help with rent, prime minister Trudeau explained. Inflation in Canada eased from a four-decade high of 8.1% in June but remains at a very high 7.6% in July. Trudeau’s fiscal shot could thwart the Bank of Canada’s fight against inflation. It has pursued an aggressive tightening path that culminated in a 100 bps hike in July. At the latest meeting in September it increased policy rates by 75 bps to an above-neutral 3.25% and alluded to further but smaller hikes.


The ECB ended net asset purchases and lifted rates with a 50 bps inaugural hike and a 75 bps follow-up move. More tightening is underway but the ECB refrained from guiding markets on the size of future hikes. Germany’s 10-yr yield broke out of the corrective downward trend channel since mid-June, suggesting more upside. The YTD high at 1.93% comes into play.

The Fed hiked to neutral by a back-to-back 75 bps in July. The size of future moves depends on the incoming data. QT hits max speed. The 10y briefly dropped below the lower bound (2.70% area) of the sideways trading range, but a sustained break lower was averted. The focus is back central bank frontloading to tackle inflation.

EUR/USD is in a strong downward trend channel since February. Last week’s hawkish ECB meeting, attempts to tackle the energy crisis and a risk rebound gathered some euro-momentum. The upper bound of the downward trend channel kicks in as first resistance around 1.0150.

The Bank of England hiked by 50 bps in august. More hikes are coming but are priced in already. Combined with the BoE’s grim economic assessment it triggered a profit-taking move. EUR/GBP broke out of the corrective downward trend channel since mid-June and is about to test the YTD high at 0.8721

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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