Tuesday, 16 May 2023
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•          Fed speakers show growing divergence on how to proceed with monetary policy. Atlanta Fed Bostic (non-voter) is inclined to pause at the June meeting, but he confirmed that the committee is still out on the issue. If he had a bias between going up or down as a next move, it would still be up. Resilient consumer spending and tight labour markets pose upside inflation risks even as the Fed’s earlier tightening measures will start having a bigger impact. Bostic pointed to the load of data coming out between the May and June policy meetings, which could alter the decision of him and his colleagues. Whatever the outcome in June, Bostic pushed back against the (financial markets’) idea about cutting policy rates soon. His baseline is to keep them at whatever peak rate until well into 2024. Minneapolis Fed Kashkari (voter) stressed that there is still a long way to go before inflation gets back down as the labour market is still hot. Therefore the Fed probably has more work to do and shouldn’t be fooled by a few months of positive (inflation) data. Richmond Fed Barkin (non-voter) told the Financial Times that there’s no barrier in his mind to further increase interest rates if inflation persists, or God forbid accelerates. He doesn’t see the urgency of making a different decision because of financial stability risks. He’s not convinced that the story of waning fiscal stimulus, eroding personal balance sheets, the lagged effects of rate moves, credit tightening and cooling demand will turn into reality which pulls inflation significantly down. Chicago Fed Goolsbee (voter) is on the other side of the aisle. He was close to dissenting last month given turmoil in the banking sector and is in for a pause in June as there’s still a lot of the impact of the 500 bps of Fed rate hikes to come. US Treasuries at the end of the day lost ground with yields adding 2.2 bps (2-yr) to 5.3 bps (30-yr). The German yield curve moved in similar fashion with yields adding 0.7 bps (2-yr) to 4.9 bps (30-yr). Both real rates and inflation expectations increased. EUR/USD recovered from last week’s losses, consolidating around 1.0870. Stock markets overall gained around 0.5%. Today’s eco calendar is stuffed with amongst others German ZEW investor confidence and US retails sales. Central bank speakers are plenty including ECB Lagarde. Another high level political meeting on raising the US debt ceiling serves as a wildcard. Strong UK labour market data this morning fail to inspire sterling after BoE chief economist yesterday hinted to prefer a rate pause at the next policy meeting. EUR/GBP remains just below the 0.87 big figure.

News Headlines

•          A series of monthly eco data (April) published this morning showed a rather sluggish post-pandemic recovery in China. At 18.4% Y/Y (8.5% YTD Y/Y) and 5.6% Y/Y (3.6% YTD Y/Y) respectively for retail sales and industrial production, both series disappointed. The high April Y/Y figures mostly mirror a low comparison base due to lockdowns in Shanghai and other cities that heavily impacted growth in April last year. Investment activity was below consensus as well with fixed asset investment rising only 4.7% YTD Y/Y (from 5.1% in March). Property investment even declined (-6.2% YTD Y/Y from -5.8% in March). The jobless rate eased from 5.3% to 5.3%, but a record high 20.4% youth unemployment rate is a high source of concern. The data are raising speculation that the PBOC will have to take additional easing measures to support activity. The yuan weakens slightly further this morning with USD/CNY trading just below 6.96.
•          The Westpac-Melbourne Institute index showed that Australian consumer confidence tumbled substantially in May. The deterioration was visible in most subcategories of the index. Overall sentiment dropped from 9.4% to -7.9%, with the decline being visible both in current conditions (-4.8% from +10.0%) and expectations (-9.6% from 9.1%). Families turned negative both on their financial conditions and the on the economy. According to the Westpac Chief economist, the decline in sentiment was affected by the announcement of the new Budget and the unexpected RBA decision to further raise the policy rate by 25 bps at its May meeting. Minutes of that RBA May 2 policy meeting revealed that some members wanted a pause and that the arguments were finely balanced but finally higher inflation risks prevailed as inflation was not expected to decline to the top of the 2-3% inflation target till mid-2025. Further increases in the interest rate might still be required, but this will depend on how the economy and inflation will evolve. The Aussie dollar declines modestly this morning from the AUD/USD 0.671 area to 0.6685, but this is probably in part due to lower than expected Chinese data rather than Australia related news.


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 KBCEconomics.be 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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