Monday, 17 July 2023
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•          Strong Q1 earnings by several Wall Street giants seemed to run away with all the attention on Friday, but eventually it was the University of Michigan’s July consumer survey which dictated the market pulse. The headline number rose unexpectedly from 64.4 to 72.6 – strongest since September 2021 and vs 65.5 consensus – with details suggesting that the Fed’s job is far from done. 1yr forward inflation expectations increased from 3.3% to 3.4% (vs 3.1% expected) with long term expectations up from 3% to 3.1%. Consumers furthermore expect their pay checks to rise at least in lockstep with inflation and aren’t afraid they lose their jobs over the next year. The Michigan Survey triggered a sell-off in US Treasuries with the front end of the curve underperforming. US yields added 2.7 bps (30-yr) to 13.5 bps (2-yr) but still ended the week significantly lower following the earlier CPI-rally. Weekly changes ranged between -11.8 bps and -31.4 bps with the belly of the curve outperforming. German yields followed the US move on Friday to a lesser extent, adding up to 5.6 bps at the front end of the curve. The front end US Treasury sell-off helped stop the week-long rot in the dollar. No more than that though. The tradeweighted greenback (DXY) ended virtually unchanged just below 100 and from a technical point of view below the support zone of 100.84 (previous YTD lows). EUR/USD in the same vein closed unchanged at 1.1228 with the weekly close above 1.1095 resistance. Stock markets ended the week narrowly mixed. The EuroStoxx50 again bumped into strong resistance at 4400 (YTD high tested already in May, June and earlier this month).
•          Asian trading volumes are low with Japan (Marine Day) and Hong Kong (typhoon) closed. Efforts to blow up this morning’s Chinese eco figures (see below) are overdone. The July Empire Manufacturing Survey and speeches by ECB members at the central bank’s 9th conference on central, eastern and south-eastern European countries are scheduled today. We don’t expect them to have a big market impact and start with a neutral bias for FI and FX. The agenda remains light the following days with ECB members joining the Fed’s blackout period and mostly second tier US/EMU eco data. US retail sales are exception to the rule tomorrow. Key things to watch are UK inflation numbers on Wednesday (cementing back-to-back 50 bps rate hikes by the BoE) and Japanese price figures on Friday (rising speculation of changes to the YCC policy). Q2 corporate earnings are the wildcard via risk sentiment.

News headlines

•          Chinese quarterly growth slowed from 2.2% to 0.8% in the previous quarter this year, matching expectations. The economy is now 6.3% bigger compared to the same period last year (7.1% expected). Accompanying monthly activity data for June showed industrial production picking up from May: at 3.8% YtD y/y it also topped a 3.5% estimate, suggesting the sector is stabilizing after a long slide. Investments rose 3.8%. Retail sales this year through June slowed to 8.2% while the property sector remains in dire straits, slumping 7.9% y/y in the period January-June. It’s this combination of slowing consumer spending and the ongoing real estate tremors that dominate this morning’s market reaction. China’s yuan holds on to losses against the USD, incurred even before the GDP data release. USD/CNY trades around 7.168. Chinese stock exchanges underperform regional peers. The Politburo’s meeting later this month will probably get more attention than usual as markets increasingly anticipate fiscal and monetary support in one way or another.
•          Turkey has significantly raised taxes on petrol, diesel and a series of other petroleum products. In some cases the levies tripled. The move comes as the country tries to fill an estimated 4.4% gap in public finances, created by amongst other’s president Erdogan’s pre-election pledge of one month of free natural gas and reconstruction works after February’s earthquake. It’s also part of the new finance minister Simsek’s plan to cool domestic demand, which is said to be still too high after years of loose fiscal and monetary policy. That has fanned inflation. Even though price pressures have come down from a peak of 85.5%  in October last year, (official) inflation was still a whopping 38.2% in June. It may well pick up again due to the steep decline in the Turkish lira over the past months. USD/TRY is trading at a record low around 26. This compares to 18.7 at the start of the year.


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 with a potential return to the cycle top, even after recent US-driven bond rally.

The Fed skipped a rate rise in June but the dot plot suggests two more to come this year with a first move due in July. A pause allows for more evidence on the pass-through of the previous tightening and on the regional bank implosion. The hikes pencilled in signal readiness to act against still elevated inflation and an ongoing tight labour market and economy. The rebound in yields ran into resistance after softer June payrolls and June CPI.

The Fed’s awkward pause, even as it is followed by more hikes, marks a stark contrast with the ECB’s ongoing decisiveness. EUR/USD overcame several ST resistance levels and even jumped beyond the 1.1095 YTD top post US CPI. EUR/USD 1.1274 (76% retracement since early 2021 top to 0.9536 cycle low) is the next reference.

The BoE’s conditional rate hike approach comes back to haunt them after April and May CPI delivered a nasty surprise and the labour market remained red hot. Money markets expect several more rate hikes, pushing sterling to a new YtD high. Short-term momentum in sterling improved, but we stay cautious MLT. Divergency within the BoE about the way forward might still change sentiment further out.

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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