Tuesday, 18 July 2023
Please  click here  to read the PDF version


•          Yesterday had little to offer from an economic point of view and that showed in daily trading. Main FI and FX markets traded sideways from the start. US stock markets (up to +0.93% for Nasdaq) parted ways with key European indices (up to -1% lower). Technical elements played in Europe after failure last week to pierce key resistance (4400) in the EuroStoxx 50. ECB members are about to join their US colleagues in the pre-meeting blackout period, but that didn’t hold some back for some last-minute comments. ECB Nagel – German, hawk by nature – stated the obvious by calling the July hike and stuck with the main message that data will decide on the outcome of the September meeting. His personal connotations – “core inflation is very sticky”, “don’t currently see a risk of overtightening” and “too early to declare victory over inflation” – barely conceal his preference though. Bank of Italy governor Visco – Italian, dove by nature – is more hopeful and believes that inflation may drop more quickly than forecast. He assumes that the drop in energy prices will more quickly show in core prices as well. Therefore, he’s wary about doing too much from a monetary policy point of view. ECB Villeroy is still scheduled to speak today and later this week, but on both occasions the topic is non-monetary policy related. The ECB’s Q2 Bank Lending Survey (July 25) is the final piece of key input ahead of the July 27 policy meeting.
•          Today’s eco calendar contains US retail sales. Consensus expects a 0.5% M/M headline gain and a 0.3% M/M increase for the retail control group (used as proxy for consumption calculations in GDP). We don’t expect retail sales to have a big market impact following final pre-Summer lull 2-way positioning at the start of the month. Traded volumes are shrinking fast and risk-reward it’s better to wait the outcome of next week’s ECB/Fed policy meetings. In this scenario, EUR/USD 1.1274 resistance (62% retracement on 2021-2022 USD rise) should theoretically hold, but risks if any are clearly for a sooner break higher. EUR/GBP moves further away from the low 0.85 support area (currently 0.86) awaiting tomorrow’s inflation numbers which should seal the (discounted) 50 bps BoE rate hike in August. On a very first small positive note, a Lloyds survey showed that UK food and drink manufacturers cut prices in June for the first time in more than 3 years.

News headlines

•          The NY Fed’s SCE credit access survey showed that the overall rejection rate for credit applicants increased to 21.8%, the highest level since June 2018. The increase was broad-based across all age groups. The rejection rate for auto loans increased to 14.2% from 9.1% in February, a new series high. It also increased for credit cards, credit card limit increase requests, mortgages, and mortgage refinance applications. The average reported expectation of applicants that a loan application will be rejected increased sharply for all loan types. It rose to 30.7% for auto loans (series high), 32.8% for credit cards, 42.4% for credit limit increase requests (series high), 46.1% for mortgages (series high), and 29.6% for mortgage refinance applications.
•          Minutes of the Reserve Bank of Australia’s (RBA) July policy meeting indicated that the MPC discussed both the option to raise the policy rate further by 25 bps or holding the cash rate unchanged at 4.10%. The case to increase the cash rate further was centered on observations that inflation was forecast to remain above target for an extended period and the risk that this timeframe would be extended without further monetary policy tightening. The labour market remains very tight, notwithstanding some easing in conditions recently. Supporting the case for leaving the policy rate unchanged, members noted that monetary policy had been tightened considerably and rapidly over the prior year and that the stance of monetary policy was clearly restrictive. Mortgage interest payments (as a share of household disposable income) were around a record high and will rise further. The MPC saw considerable uncertainty about the resilience of household consumption. The MPC also pondered the risk that the unemployment rate would rise beyond the rate required to ensure inflation returns to target in a reasonable timeframe. The MPC concluded to leave the policy rate unchanged an reassess the situation at the August meeting. Some further tightening may be required but this depends on how the economy and inflation evolve.


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

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). Read the full disclaimer.

Register for a 2 week free trial today, pass a Growth, Venture or Rocket Tryout and get a funded prop trading account for upto $120,000.