Monday, 15 May 2023
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•          May University of Michigan consumer confidence unexpectedly set the tone for the final WS trading session of last week. The headline indicator fell more than expected, from 63.5 to 57.7, the lowest level since July of last year. Markets zoomed in on the forward looking inflation expectations component of the report though. 1-yr forward inflation expectations fell less than hoped, from 4.6% to 4.5% with long term (5-10yr) expectations picking up from 3% to 3.2 % (vs 2.9% consensus), the highest level since March 2011! Similar signs came from the NY Fed’s most recent Survey of Consumer Expectations (3y & 5y inflation expectations up 0.1 ppt) and in Europe from the ECB’s Consumer Expectations Survey. Median expectations for 1y and 3y EMU inflation respectively rose from 4.6% to 5% and from 2.4% to 2.9%. US Treasuries sold off after the Michigan survey, underperforming German Bunds. US yields added over 9 bps at the 2-7y part of the curve with longer tenors adding 5 to 8 bps. The US 2y yield closed just below the psychological 4% mark. A dissection of the yield increase shows that it was especially driven by higher US real yields, suggesting that markets probably pushed the idea of a conditional rate pause and especially H2 2023 rate cuts too far. German yields rose by 5-6 bps across the curve last Friday. The relative yield advantage, higher real yields and a risk-off climate (US stocks initially sold off in line with US Treasuries) supported last week’s USD rebound. EUR/USD closed at 1.0849 (lowest close since March 31) from an open at 1.0916. The trade-weighted dollar powered ahead to 102.71, taking out first minor resistance at 102.40.
•          Today’s eco calendar contains EU Commission economic forecasts and the US Empire Manufacturing Survey. We don’t expect them to interfere with recent market trends. Core bonds are trapped in sideways rages. Especially the topside in German Bund future and US T-Note seems very well protected. In FX space, the euro is having a harder time against both the dollar and sterling. Risk sentiment is shacky, but stronger than feared given lingering issues like the US debt ceiling and regional banking crisis. Several ECB/BoE/Fed members shed their views on policy and this will be a red line throughout the week. It serves as a wildcard. Key eco points this week include tomorrow’s UK labour market report and US retail sales. Strong UK labour data could further help sterling moving away from the EUR/GBP 0.8719 support area, broken last week.

News Headlines

•          Turkish presidential elections might head for a second run-off vote. According to results mentioned by Bloomberg President Tayyip Erdogan is leading by winning 49.3% of the votes while opposition leader Kemal Kilicdaroglu gained 45% support. The tally was made on the basis of more than 98% of the votes counted. One of the candidates needs to reach 50% of the votes to avoid a run-off. A run-off would take place on May 28 and could lead to a period of additional uncertainty for Turkish markets, including for the Turkish lira. The lira in early trading this morning is losing modest further ground trading at USD/TRY 19.625. Anadolu news agency reported that the current parliamentary alliance, including Erdogan’s AKP and the Nationalist Movement party, managed to hold on to their majority, clinching 323 seats in 600-seat parliament.
•          Rating agency Fitch on Friday confirmed Italy’s credit rating at BBB with a stable outlook. Fitch took notice of stronger than expected growth in Q1 (0.5% Q/Q vs -0.2% expected). The rating agency upwardly revised Italy’s 2023 growth to 1.2%, but 2024 growth was downwardly revised to 0.8%. Fitch expects inflation to decline to an average 7.2% in 2023 and 3.5% in 2024 due to a normalization of energy prices and only limited second round effects. On fiscal policy, the agency indicated that recent Stability programme sets out credible fiscal goals in continuity with the fiscal policy of the previous government. The plan sets out a fiscal deficit of 4.5% in 2023, 3.7% in 2024 and 3% in 2025. The rating agency even sees risks for lower deficits as the government started from conservative assumptions. Fitch expects the debt-to-GDP ratio to decline to 142.3% of GDP in 2024 (was 144.4% in 2022). While this is a decline of 12.6 ppts compared to the peak in 2020, it is still above the pre-pandemic level of 134.1% (2019).


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 below European/German yields.

The Fed hinted at a pause after delivering a 25 bps hike in May. The regional bank implosion is expected to additionally weigh on activity going forward. But elevated inflation ties the central bank’s hands in terms of rapid rate cuts. Markets disregard Fed guidance and expect the cutting cycle to start in 2023 H2 nonetheless. Short term yields remain near YtD lows. Longer tenors, including the 10-yr, suffer from recessionary fears. Support around 3.3% survived.

The euro profited from subsiding energy concerns and the ECB’s policy stance. Even as the latter downshifted the tightening pace, it retains a hawkish upper hand vs. the Fed. Combined with local financial stability concerns, a sustained dollar comeback is unlikely. Failure to break the EUR/USD 1.1095 YtD high triggered rebound action lower.

The usually risk-sensitive pound proved surprisingly resilient during the banking turmoil. The BoE raised rates by 25 bps. A next move higher is still conditional but in any case priced in already. Divergency within the BoE about the way forward contrasts with ongoing hawkish ECB rhetoric. It adds to the already weak structural GBP cards (weaker growth prospects, twin deficits, long term brexit consequences…), but sterling tries to fight back.

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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