Tuesday, 17 May 2022
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•          Dismal monthly Chinese eco data (April) only dented risk sentiment somewhat during Asian dealing. Calm returned in Europe, also following big swings last week. German Bunds ceded ground, underperforming US Treasuries. Dynamics changed again somewhat as US investors entered dealings. They preferred a more cautious approach with a very weak US Empire Manufacturing Survey and rising Covid-levels in NY sounding the alarm bell. Daily US yield changes eventually ranged between -4 bps (5-yr) and +1.9 bps (30-yr) with the belly of the curve outperforming the wings. The German curve flattened with yields 3 bps higher at the front end and 1.9 bps lower at the very long end of the curve. 10-yr yield spread changes vs Germany ended broadly stable with Greece underperforming (+6 bps). The dollar ceded ground with the trade weighted greenback searching resistance-turned-support around the 104 big figure. EUR/USD 1.0341 survived twice last week with the pair creating some breathing space near 1.0450. Sterling outperformed with BoE governor Bailey’s testimony before the Commons treasury committee outweighing looming brexit worries with PM Johnson about to sign off on unilateral changes to the Northern Irish Protocol. EUR/GBP returned sub 0.85, changing currently hands at 0.8460. Bailey’s comments sounded much more combative in fighting inflation than the previous BoE-meeting suggested. Unlike a fortnight ago, the onus was clearly on runaway inflation and the very tight labour market (as proven by this morning’s labour market report) rather than on the grim growth outlook. Bailey can’t prevent inflation from running above 10% (currently 7%), warned for the apocalyptic risk of food inflation and said that price pressure has to get back to the 2% target, even as it comes with a cost for the economy. Three-month SONIA futures traded slightly (2-3 bps) higher on the day. They discount a 2% BoE policy rate by the turn of the year (currently 1%) with policy rate peak around 2.25%-2.5% mid next year.
•          Asian bourses gain around 0.5% this morning with China outperforming. Core bonds drift away. The eco calendar contains details of the first quarter EMU GDP figure (0.2% Q/Q) and especially US retail sales. High inflation will at some point start affecting US consumption as well. It could strengthen belief that at least for now, sufficient Fed tightening is discounted, suggesting consolidation ahead for core bonds and taking away momentum from the dollar. Speeches by central bankers, including Fed Powell and ECB Lagarde, are wildcards today.

News Headlines

•          The Reserve Bank of Australia considered three options related to the size of its first rate hike this cycle earlier this month. Minutes released today showed that a 15 bps hike to bring the policy rate to 0.25% didn’t make sense according to the board since policy was extremely stimulative and rates would have to be raised further anyway. A 40 bps step (to 0.50%) was a possibility as well but didn’t make the cut either. Instead, the RBA chose for a regular 25 bps hike, arguing that the high meeting frequency (monthly) gives provides ample opportunities to review the pace. Market bets for a higher-than-normal rate hike at the June meeting are gently creeping higher (>30 bps currently discounted). There’s a total of 240 bps additional tightening discounted by the end of the year. The Aussie dollar tops AUD/USD 0.70 this morning, with part of the appreciating following the RBA Minutes.
•          The Hungarian forint yesterday temporarily weakened 2% to beyond EUR/HUF 390 before trimming losses. The pair still closed near the record lows seen in the wake of the Russian invasion. The swings followed PM Orban’s inaugural speech after being sworn in for a fifth term. In it, he launched a fresh attack against Europe and warned for a decade of “danger, uncertainty and war”. Domestically, Orban mentioned a string of (pre-election) programs, including household utility and family subsidies, that he intends to keep in place. Food, fuel and mortgage price caps are set to expire in July unless they are extended. Hungary is also still involved in a rule-of-law dispute with the EU. The Commission currently withholds already more than €7bn of pandemic aid.


The ECB will end net asset purchases in June. A first rate hike is likely in July (or even June?!). Speculation has caused real yields to bottom out. Inflation expectations, while stile high, are correcting lower from record highs. The jury is still out, but a correction in nominal yields may be in the making. 0.80% serves as first support.

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 start in June and hit max speed from September onwards. But the recent yield surge this caused as markets adjusted, has eased recently. Yields may be entering a period of consolidation. Important support is located at 2.72%.

EUR/USD lost the previous YTD low at 1.0806 and the 2020 bottom at 1.0636, suggesting a return to the 2017 low at 1.0341. Even president Lagarde finally caving for a July rate hike couldn’t lift the euro’s spirits. Too little, too late?! Russian war in Ukraine plays in the euro’s disadvantage as well.

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 doubt starting to filter through in markets. Open division within the BoE and the limited room for further tightening pushed EUR/GBP above the 0.8512 level. A sustained break would be a bad omen for sterling.

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).
These market recommendations are the result of qualitative analysis, incorporating room for past experiences and personal assessments. The views are based on current market circumstances and can change any moment. The most prominent input comes from publicly available data, financial news, economic and monetary policies and commonly used technical analysis.
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