Monday, 17 April 2023
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•  On Friday, (US) bond markets continued building on the post-payrolls trading paradigm that guided trading for most of last week. US import and export prices printed weaker than expected. January retail sales (headline -1.0%, control group -0.3% M/M) were mixed, at best. Even so, a shy uptick of Treasuries/downside test in yields immediately after the data release triggered renewed selling interest. More or less at the same time, Fed’s Waller indicated that recent developments warrant further tightening. Later, the consumer confidence report from the University of Michigan also supported a more hawkish positioning. Both current conditions and expectations printed stronger than expected. Inflation expectations 1-year ahead even jumped to a ‘shocking’ 4.6% from 3.6%. The market reaction to the Michigan data was modest. Even so, at the end of the day US yields gained between 13.6 bps (2-y) and 4.75 bps (30-y). The 2-y yield ‘easily’ surpassed the 4.0% barrier (close 4.10%). The 10-y closed just north of the 3.50% barrier. Market now again see an 80% chance of a Fed rate hike at the May 3 meeting. German yields followed the US ‘at a distance’ adding between 10.2 (2-y) and 4.5 bps (30-y) as several ECB governors last week suggested that at a 3.75% peak policy rate is probably necessary to clamp down inflation. US equities closed in red (S&P 500 -0.21%) but off the intraday lows. The rebound in US yields finally also caused USD shorters to take some chips off the table going into the weekend. DXY rebounded from an intraday low near 100.80 to close at 101.58. EUR/USD failed to extend gains beyond the 1.1033 previous YTD top to close at 1.0994. Sterling underperformed the dollar and the euro with EUR/GBP extending its bottoming process (close 0.8855).
•  This morning Asian markets show no clear directional trend. Today, the calendar is thin with only the US Empire manufacturing survey and NAHB housing index as data series worth mentioning and this will also be the case for most of this week. Friday’s PMI’s are the most high profile data series. China will publish Q1 GDP data tomorrow. ECB and Fed members will be able to give ‘final’ guidance in the run-up to the early May policy meetings. Investors will keep a close eye at the first corporate earnings/guidance. After last week’s rebound in yields, markets now are positioned more neutral compared to pre-payrolls. 4.17/25% & 3.64% is first (tough?) resistance respectively for the US 2 & 10-y yield. If the rally in (US) yields slows, the dollar might have difficulties to stage a sustained comeback. EUR/USD 1.1185 (March 2022 top) is next topside reference on the charts. EUR/USD 1.0831 remains first important support. UK markets will receive an in extenso data update this week (labour data Tuesday, inflation Wednesday, retail sales Friday) as markets ponder whether the BoE should take a pause in its hiking cycle early May. 

News Headlines

•          Poland and Hungary temporarily suspended imports of Ukrainian grain in a move that’s aimed to put a bottom below sliding domestic grain prices and protect local farmers. After Russia’s invasion, the EU scrapped customs and quotas on Ukrainian grain imports and redirected some shipments from blockaded ports at the Black Sea via Poland and Romania. Most of that was meant for re-export to the Middle East and Africa but instead stayed in countries near Ukraine due to shortages of trucks and trains. Trade policy is an exclusively EU competence. With the move, both countries thus risk opening a new rift with the EU, alongside long-running disputes over the rule of law.

•          The Bank of England is considering a major reform of the deposit guarantee scheme, the Financial Times reported. Under current rules, the guarantee limit is set at £85 000, which covers only about two-thirds of deposits of businesses. In addition, the system is relatively low pre-funded, causing a delay of at least a week for customers to regain access to their cash in case of an SVB-alike event. This undermines the confidence in and thus the effectiveness of the scheme. Regulators are mulling a higher amount of insured deposits. Alternatively, they could increase the amount guaranteed for specific uses, such as working capital. A higher level of pre-funding to eliminate the payout delay is also being considered.


The ECB stuck to its plan to hike the deposit rate by 50 bps in March despite recent turmoil around some regional US banks and Credit Suisse. It provided no specific guidance for the May meeting, but clearly stated that more ground has to be covered if inflation develops as forecast (>2% over policy horizon) and recent uncertainty wanes. Such scenario should put a floor below yields despite the huge amount of volatility.

The Fed delivered a 25 bps dovish hike in March. Uncertainty around the fall-out from the regional bank implosion clouds the outlook. The new dot plot suggests one more final move this year. It does not show rate cuts pencilled in for 2023 but markets beg to differ. Short-term US yields tanked. Longer tenors suffer from recessionary fears. The 3.3% support area was tested multiple times but survived. A return above 3.50% is needed to call off the downside alert.

The euro profited from the ECB’s unabated hawkish stance and subsiding energy concerns. The nearing end and expected (by markets) reversal of the Fed cycle meanwhile weighed on the dollar. EUR/USD is challenging the 1.1033 YTD top. A confirmed break technically implies a return to 1.1185.

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…).

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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