Monday, 18 July 2022
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•          Markets on Friday closed a volatile week on a positive note. The move was at least partially inspired by investors taking a more guarded approach on next week’s Fed meeting. The FOMC for sure still will debate both a 75 and 100 bps step. However, several Fed governors including Bullard, Waller, Bostic and George suggested that the bar of a 1.0%pt hike is quite high. Friday’s US data weren’t enough for markets to further embrace the idea of such a step. US retail sales were solid (headline 0.9% M/M, control group + 0.8% M/M). The headline figure of the Empire Manufacturing survey also unexpectedly improved from -1.2 to +11.1. Still, forward looking indicators pointed to difficult times ahead. Consumer confidence of the U. of Michigan improved slightly but stays near multi-year lows. The closely watched measures of inflation expectations eased to 5.2% (from 5.3%) and 2.8% (from 3.1%) for the 1-y and 5/10-y expectations respectively. Markets concluded this mix isn’t enough for the Fed to deliver another hawkish surprise. US yields declined between 1.2 bps (2-y) and 4.4 bps (10-j). Money markets discount only a +/- 20 % chance of a 100 bps hike. German Bunds outperformed with yields easing between 5.6 bps (2-y) and 2.3 bps (30-y). The German 10-y yield still struggles not to fall below the key 1.12/1.18% support area. Despite persistent fears for a sharp slowdown (US) or even a recession (Europe), the decline in yields provided some breathing space for equities. US indices gained up to 2.16% (Dow). The EuroStoxx50 rebounded 2.37%. The risk revival also capped further USD gains. DXY retreated off Thursday’s multi-year top to close near 108.06. USD/JPY eased from the 139 area to close at 138.57. EUR/USD rebounded off the 1.00 reference to finish at 1.008. Still, this was a USD correction rather than a euro rebound.

•          Today’s calendar is almost empty. Markets will look forward to key events later this week including the ECB policy meeting, the restart of Russian gas supply via the Nord Stream 1 gas pipeline and the political crisis in Italy. US and EMU data only will play second fiddle with Friday’s EMU PMI’s the exception to the rule. Risk sentiment in Asia is constructive. US and European futures also suggest a positive open. Short-term, investors apparently concluded that a negative scenario on (European) energy supply is largely discounted. Question is whether this is enough a reason for a sustained euro comeback. At least the news flow from Italy doesn’t sound positive with center-right parties (Lega & Forza Italia) no longer backing the Draghi government. On interest rate markets, US yields entered consolidation pattern off recent lows going into upcoming event risk/next week’s Fed meeting. European long term yields are testing key support (German 10-y 1.12%, Euro 10-y swap 2.0% area). The picture looks fragile, but we’re reluctant to anticipate a sustained break lower going into the start of the ECB hiking cycle.

News Headlines

•          Inflation in New Zealand sped up to the fastest in more than three decades. In Q2 this year, prices rose faster-than-expected 1.7% q/q or 7.3% y/y. Stats New Zealand identified housing and the household utilities group as the main driver, followed by transport due to higher petrol and diesel prices. “Supply-chain issues, labour costs, and higher demand have continued to push up the cost of building a new house,” general manager Attewell said. The Reserve Bank of New Zealand last week raised policy rates to 2.5%. By doing so, it entered neutral-to-slightly-restrictive territory as the central bank tries to ease inflationary pressures. The RBNZ said it will keep tightening “at pace”. Markets expect the policy rate to peak around 4% with swap yields adding a few more bps after the CPI release this morning. The kiwi dollar tested NZD/USD resistance at 0.62 but failed to push through.

•          China is looking to stem the mortgage payment boycott by urging banks to increase lending to developers so they can complete unfinished housing projects, a newspaper published by the China Banking and Insurance Regulatory Commission reported on Sunday. Homebuyers across the country have ceased to pay their mortgages on stalled projects. The phenomenon sparked fears of the property sector crisis spilling over into the financial sector even though banks repeatedly said the amount of loans affected is limited and controllable. It may also affect confidence and could keep potential homebuyers on the sidelines, posing risks for the broader housing market.


The ECB turned the corner in its inflation narrative. The central bank ended net asset purchases, facilitating rate hikes from this month. German 10-yr yield pushed through to the highest level since early 2014. The move ran into resistance at 1.9% (50% retracement on long term decline) before correcting lower on increasing growth worries. First important support at 1.18%/1.12% remains under pressure.

The Fed started an aggressive tightening cycle. Another (June) inflation surprise raised the odds for a 100 bps hike in July instead of the flagged 75 bps one. QT will hit max speed by September. But markets discounted a good deal already and focus is at least as much on growth. The 2.72% area was tested but didn’t break. Sideways consolidation over the summer is in the cards.

The euro zone’s (energy) crisis is being accompanied by an unfolding Italian political crisis. Markets ponder the ECB’s ability to deliver rate hikes in such circumstances, even with inflation being sky high. Growing recession fears hammered EUR/USD below the 2017 low of 1.0341. Parity is being tested. A sustained break lower paves the way towards intermediate support around 0.96 before a return to the all-time low of 0.823.

The BoE in June signaled it might step up tightening. Initially this didn’t help sterling. However, a combination of euro weakness, PM Johnson leaving, the sharp correction in the oil price and the BoE reiterating its anti-inflation commitment, finally triggered a sterling short squeeze, pushing EUR/GBP below the established uptrend.

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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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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