Tuesday, 16 August 2022
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•          Disappointing July Chinese eco data and some PBOC monetary policy easing were the main talking point at the start of the new trading week. The Chinese central bank cut its 1-yr medium term lending facility rate unexpectedly by 10 bps, from 2.85% to 2.75%. It was the first cut since January. The decision came just before the release of July economic data which pointed to decelerating growth in production (3.8% Y/Y; 3.5% YTD YoY), retail sales (2.7% Y/Y; -0.2% YTD YoY) and investments (5.7% YTD YoY). New Covid-outbreaks and the governments zero-Covid policy dampened growth at the start of Q3 while also clouding the outlook. The country last month toned down its guidance for this year’s growth target from around 5.5% to “trying to achieve the best possible outcome”. The monthly eco data amplified global growth worries and provided an early bid for core bonds. Oil prices were slipping and went into tailspin once Iran’s foreign minister Amirabdollahian signaled that a new nuclear deal is near. The country sent its official response to reviving the 2015 the Joint Comprehensive Plan of Action (JCPOA) to the EU while it’s already nearer to a deal with the US. Relancing JCPOA implies a return of Iranian oil to the market. Brent crude yesterday fell from around $98/b to $93/b. An empty European eco calendar meant that Chinese growth and the Iranian nuclear deal remained the key trading input up until the release of the August Empire Manufacturing index. NY business sentiment unexpectedly crashed from 11.10 to -31.3, by far the weakest reading since May 2020. Details offered no relief. New orders slumped from 6.2 to -29.6 with shipments collapsing from 25.3 to -24.1. Employment and average workweek indicators fell as well with producer input prices showing a second month of steep decline following over 12 months (April 2021 – June 2022) at sky-high levels. All these sub-indicators are a warning signal for H2 growth. We’ll look for more regional confirmation in this week’s Philly Fed Business Outlook and next week’s Richmond Fed Manufacturing index. US Treasuries spiked higher after the Empire Manufacturing Survey with the front end of the curve outperforming. The curve turned less inverse with yields ceding 6.2 bps (2-yr) to 0.9 bps (30-yr). German yields lost around 8 bps across the curve. The dollar extended Friday’s gains. EUR/USD’s failure to regain first resistance around 1.0350 (May & June lows / topside downward trend channel) prompted rebound action lower with the pair currently changing hands at 1.0165. EUR/GBP copied that move south with the pair closing at 0.8428 from an 0.8453 open. This morning’s decent labour market figures don’t spark a market reaction. UK employment rose by 160k in the 3 months ending June, below 268k consensus with the unemployment rate stabilizing at 3.8% over that same period. Average weekly earnings accelerated to 4.7% Y/Y ex. Bonuses. Monthly (July) data showed a 73k net job gains with jobless claims falling by 10.6k.

News Headlines

•          The German government decided that consumers will have to pay and extra 2.419 euro cents per kilowatt hour for natural gas from October onwards. Economic minister Habeck said that the levy is a consequence of Russian President Putin’s illegal war of aggression against Ukraine and the artificial energy shortage caused by Russia. The levy will be imposed through April 1 2024 and suggests an annual cost of about €290 for a 4-person household. Some households will be granted some subsidies to dampen the impact of the price rise. The latter will deteriorate German inflation dynamics (already at 8.5% Y/Y in July) further.
•          The Reserve Bank of Australia published Minutes of its early August policy meeting, when it hiked the policy rate by 50 bps from 1.35% to 1.85%. The board expects to take further steps in the process of normalizing monetary conditions over the months ahead, but it is not on a pre-set path. The central bank hinted to get (at least) towards a neutral level of around 2.5% with money markets expecting a 3.25% policy rate by the end of the year.


The ECB ended net asset purchases and lifted rates with a 50 bps inaugural hike. More tightening is underway but the ECB refrained from guiding markets on the size of future hikes. Economic indicators however show growth is stalling or even contracting. Markets doubt whether tightening may last in 2023. Germany’s 10-yr yield extended a correction lower until 0.67% (62% retracement on March/June move) before consolidating.

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 will hit max speed by September. But markets question the Fed’s hawkish intentions following a string of weak data. Yields are under pressure. The 10y briefly dropped below the lower bound (2.70% area) of the sideways trading range.

The euro zone’s (energy) crisis is being accompanied by an Italian political crisis. Growing recession fears hammered EUR/USD below the 2017 low of 1.0341. Parity was tested before a technical (USD-driven) correction higher kicked in. A tactical dollar pause is at hand but the euro remains strategically under pressure. It takes a return above EUR/USD 1.035 to call off the immediate downside alert.

Sterling’s strong run going into the BoE meeting of August abruptly ended. The central bank hiked by 50 bps. More hikes are likely given stellar inflation, but have been priced in already. Combined with the BoE’s grim economic assessment it triggered a profit-taking move with short-term EUR/GBP upside potential to 0.8512. Euro weakness remains a risk acting as an opposing force

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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