Wednesday, 17 May 2023
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There will be no KBC Economics-Markets reports on Thursday, May 18 and Friday, May 19.
We resume our publications on Monday, May 22.


•          US treasuries extended their underperformance against German Bunds yesterday as some data beats strengthen the notion that the US customer isn’t backing down yet, hinting at a more resilient economy. Core US retail sales rose by 0.6% M/M with the control group even gaining 0.7% M/M and providing a solid start to Q2. The NAHB housing index increased a fifth consecutive time to the highest level since July (see News & Views). More Fed governors weighed in the debate, highlighting the toss-up that the June policy meeting will be. NY Fed Williams seems in favour of a wait-and-see approach like Chicago Fed Goolsbee and to a lesser extent Dallas Fed Logan. Atlanta Fed Bostic will let the data decide while Minneapolis Fed Kashkari and Richmond Fed Barkin believe there’s no barrier to further rate increases. Cleveland Fed Mester joined that hawkish camp: “At this point, based on the data I have so far, given how stubborn inflation has been, I can’t say I’m at a level of the Fed Funds rate where it’s equally probably that the next move could be an increase or a decrease”. US yields rose by 1.1 bp (30-yr) to 7.3 bps (2-yr). German yields added 3.9 bps (30-yr) to 6.1 bps (5-yr). Mixed German ZEW investor sentiment went unnoticed. Hawkish Austrian ECB member Holzmann said that he preferred a 50 bps rate hike earlier this month and that the ECB shouldn’t pause hikes before they reach 4%. After last month’s decision, he thinks that the bar to returning to 50 bps rate hikes is high. The dollar overall profited from the yield advantage with the trade-weighted greenback (DXY) testing the recent high at 102.75. EUR/USD approached the sell-off low at 1.0846, before closing at 1.0862. US stock markets yesterday underperformed (Dow -1%) with risk aversion creating some additional USD-safe haven flows. The US debt ceiling stalemate remains firmly in place with US Treasury Secretary Yellen’s warnings proving futile for the moment. Apart from the US T-Bill and CDS market, the overall market impact remains low even as we’re only a fortnight away from the assumed “X-date”. Previous debt ceiling episodes learnt that a solution will eventually follow. Today’s eco calendar is extremely thin with only US housing starts and building permits. It doesn’t become much better on Thursday and on Friday, making way for central bankers and especially risk sentiment to set the tone for trading. Current trends are sluggish stocks, weakness in US Treasuries and a better dollar.

News Headlines

•          Q1 Japanese growth rebounded more than expected. Activity during the January-March quarter expanded at an annualized rate of 1.6% (0.4% Q/Q), beating expectations for a more modest growth of 0.8%. Activity was mainly supported by a rebound in private consumption (0.6% Q/Q) and business spending (0.9% Q/Q) as consumer spending regained traction post-Covid. Tourism was an important factor in the consumption revival. Net exports subtracted 0.3 ppts from growth as exports (-4.2%) declined faster than imports (-2.3%). The Q1 GDP price deflator printed exactly at 2%, close to expectations. The figure for the previous quarter was downwardly revised from 0.1% (QoQa) to -0.1%, which brought to economy in a technical recession in the second half of last year. A rebound in domestic demand as such is a positive development. However, the Q1 data probably needs confirmation for the BOJ to change its ultra-easy monetary policy. Markets this morning aren’t preparing for such move as the 10-y yield dropped 3 bps to 0.367%. The yen also weakens with USD/JPY extending recent uptrend (136.65).
•          US NAHB Home Builders sentiment unexpectedly increased further from 45 in April to 50 in May. According the NAHB statement “Limited existing inventory, which has put a renewed emphasis on new construction, resulted in a solid gain for builder confidence in May even as the industry continues to face several challenges, including building material supply chain disruptions and tightening credit conditions for construction loans”. The May rise in the index was the fifth consecutive monthly rise. It was the first time for the index to reach the 50-level since July 2022.


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

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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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