Wednesday, 15 June 2022
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•          Yesterday morning, it looked that especially US bonds were be ripe for a pause after the recent sharp sell-off ahead of today’s Fed policy meeting. In the end though, the established trends remained firmly place. Eco data (German ZEW mixed, US PPI) had limited impact. It was all about assessing CB’s reaction function to recent high inflation. For now, markets assume frontloading to remain the name of the game, at the Fed and the ECB. Markets discount 75 bps Fed hikes for today and next month. After temporarily easing, US yields rose an additional 10/11 bps for the 5/10-y with 2 & 30’s gaining 7+ bps. The US 10-y real yield gained 13.7 bps (0.82%). German/EMU yields also kept solid upward momentum rising between 8.4 bps (2-y) and 14.1 bps (30-y). The swap curve flattened with the euro 2-y closing just below 2.0% (+20.9 bps!). Equity sentiment stayed fragile, but moves were more modest compared to previous days (EuroStoxx50 -0.78%, S&P -0.38%). The USD DXY index extended gains above the previous 105 resistance (close 105.52). USD/JPY closed at the highest level since Oct 1998 (105.47). Favourable interest rate moves initially supported EUR/USD, but in the end the pair closed little changed at 1.0416. ECB’s Schnabel confirmed that ECB stands ready to act against intra-EMU market fragmentation. Sterling sharply underperformed. Labour market data were OK, but markets focused on deeply negative real wages and recent poor output data. The UK’s intention to unilaterally change the Brexit deal also didn’t help sterling. EUR/GBP easily cleared the 0.8619/70 resistance (close 0.8683). A sustained break above 0.8720, would be highly significant from a technical point of view.

•          Asian equities mostly trade in the red this morning, with China outperforming as May production data printed stronger than expected. The yuan rebounds slightly further (USD/CNY 6.718). The dollar eases of recent peak levels (DXY 105.14, USD/JPY 135.00). Later today, US retail sales, the Empire manufacturing and the NAHB housing index are all worth keeping an eye on as is the case for a long list of ECB speakers. Evidently, all this will be overshadowed by the Fed policy decision. Anything different from 75 bps hike would be a big surprise. We also expect Powell to confirm a similar step for July unless the inflation picture improves materially. For now, we don’t expect the Fed Chair to openly flag the option of 100 bps steps. The Fed will also publish an update of the forecasts of the induvial Fed governors (dots). We keep a close eye whether/how much the neutral rate will raised (was 2.4% in March). The forecasts for the expected interest rate path for this and next year might be a bit ‘outdated’ after the recent sharp market reposition. In a broader perspective, we expect the Fed to confirm its anti-inflation commitment, but not to add fuel after recent sharp yield rise. Powell might indicate that recent and planned steps should gradually yield results in a not that distant future. A stabilization/slower rise in yields also might cap the USD-rally. At the time of writing, the ECB announces an ad hoc meeting today (potentially on market fragmentation?).

News Headlines

•          The Australian Fair Work Committee completed its annual wage review (2021-22) and decided to raise the national minimum wage by AUD 40 per week which amounts to an 5.2% increase. The NMW will be AUD 812.6/week or AUD 21.38/hour. The larger-than-usual increase came as inflation put real wages under pressure since mid-last year. Australian inflation printed at 5.1% Y/Y in Q1 2022 which served as the proposed floor for the NNW hike. RBA governor Lowe yesterday in a speech deviated from the RBA policy statement by saying that inflation could hit 7% by Christmas (vs peak around 6% in H2 2022). The central bank will therefore do what’s necessary to bring inflation back down to the 2%-3% target. His comments suggest that the RBA will also shift to 50 bps rate hikes from July onwards. Over the past week, the Australian swap curve bear flattened with yields adding 70 bps (3-yr) to 50 bps (30-yr). The Aussie dollar couldn’t keep pace with the US one, with the risk-off climate weighing additionally on AUD. AUD/USD fell towards the 0.6829 YTD low, but a real test didn’t happen yet. This morning’s Westpac consumer confidence had no market impact. The index fell for a 7th consecutive month, from 90.4 to 86.4, the lowest level since August 2020. Households are especially worried about family finances and the economy 1 year ahead.


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 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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