Wednesday, 18 May 2022
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•          Yesterday’s trading session turned out to be an interesting one. As on Monday, it started with a better risk mood in Europe with core bonds returning to sell-off mode after last week’s correction. UK Gilts initially underperformed following up on BoE governor Bailey’s testimony for a Commons Committee. He sounded much more combative against inflation than suggested by the May policy meeting. Around noon, ECB Knot raised the stakes in the central bank’s calling for >25 bps rate hikes if warranted by the data. His comments prompted a reaction in short term European money markets as well as on bonds markets (start new intraday downleg). FOMC Chair Powell ended the 24 hour hawkish central bank tour by stressing the unconditional tightening plans. “Restoring price stability is an unconditional need. It is something we have to do.” Even as “there could be some (economic) pain involved”. If needed, the Fed won’t shy away to make monetary policy restrictive. Powell’s comments dealt the final intraday blow to US Treasuries. In between the rhetoric, we had strong UK labour market data, an upward revision to EMU Q1 GDP and decent US retail sales all helping to put last week’s growth worries to bed. At least for now. The US yield curve bear flattened with yields rising by 14.3 bps (3-yr) to 7.9 bps (30-yr). German yields rose by 7.3 bps (30-yr) to 12.7 bps (5-yr). The UK yield curve bear flattened as well with yields ending 20.8 bps (2-yr) to 11.5 bps (30-yr) higher. The hawkish rhetoric and fierce bond sell-off didn’t translate into a new sell-off on stock markets, suggesting that bourses could be heading for a period of some consolidation. Technical pictures for now don’t confirm a sustained improvement yet. The dollar threw the towel on FX markets following last week’s intense test of key resistance levels (eg EUR/USD 1.0341). There was an element of euro strength as well in the rebound to EUR/USD 1.0535. EUR/GBP initially dived from a 0.8468 open to 0.84 before rebounding towards the 0.8435 area. Brexit worries for now play second fiddle. UK April inflation accelerated as expected from 7% Y/Y to 9% Y/Y for the headline reading and from 5.7% Y/Y to 6.2% Y/Y for the underlying core measure.
•          Today’s eco calendar is fairly uneventful. US housing data and final EMU inflation numbers won’t stir trading. Central bank comments remain a wildcard. The pace of yesterday’s bond sell-off is unlikely to be repeated in these conditions. EUR/USD’s rebound was a good one, but the pair still has to take out first minor resistance  at 1.0642. The bearish picture only turns morning neutral beyond 1.08.

News Headlines

•          Japanese first quarter GDP contracted less than feared, declining 0.2% q/q (-1% annualized) vs 0.4% expected. This was mainly because of private consumption, which held up better during Covid curbs than foreseen (flatlining vs consensus for a -0.5% fall). Business spending rose 0.5%. Exports rose 4.7% but imports soared with double digits, resulting in a negative net-export contribution. Inventories were built up during the previous quarter and may be drawn down during the current one. Pent-up consumer demand is expected to support growth this quarter, pushing the other way. But high energy prices and its effect on spending poses downside risks to the outlook. The Japanese yen is little affected by the data. USD/JPY trades stable in the low 129 area.
•          Australian wage growth in the first three months of the year rose by 0.7% q/q to be up 2.4% year-over-year. Both were slightly below expectations of 0.8% and 2.5% respectively but it’s still the biggest annual growth since 2018. The sectors posting the biggest gains were rental/property (3.1% q/q), manufacturing (2.7% q/q) and arts & recreation services (2.7% q/q). It serves as important input to the Reserve Bank of Australia, who tied sufficient wage growth to the start of the tightening cycle. However, with inflation already having accelerated above target, the RBA didn’t want to await today’s reading when it met earlier this month (+25 bps to 0.35%). The Australian dollar temporarily lost a few ticks this morning. AUD/USD tested the 0.70 figure.


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 worrying growth outlook complicates the picture and triggered a first meaningful correction since the start of the Russian invasion. Support at 0.80% stood firm.

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 temporary above the 0.8512 level. A sustained break would be a bad omen for sterling.

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).
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