Tuesday, 18 October 2022
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•          The UK’s new finance minister Hunt teared his predecessor’s mini budget to pieces and that set the tone on global markets yesterday. Nothing survived other than the reversal of the National Insurance increase and the cut to stamp duties. Hunt went even further and limited the extraordinary costly government price guarantee on energy from two years to six months (ending in April next year). Core bonds cheered and Gilts obviously took the lead. UK yields tumbled between 32.7 bps (2y) to 40.6 bps (30y). Such big moves affected peers. The German yield curve flattened too. Rates at the short end recouped opening losses with relative ease (closing flat) but long maturities dropped more than 10 bps. Yields in the US finished lower with the curve turning less inverse. Disappointing NY manufacturing sentiment helped push the front-end 5.2 bps lower. Equity sentiment was bullish. The EuroStoxx50 rebounded 1.8%. Wall Street won back Friday’s losses, surging between 1.9 and 3.4%. A weaker USD made the mirror image with Friday complete. The greenback lost against major peers but the yen (USD/JPY above 149). GBP/USD outperformed, rising from 1.118 to 1.136. EUR/USD rose above 0.98(4). The trade-weighted dollar just made it above 112.
•          New Zealand inflation eased way less than hoped-for (see headline below). It’s grabbing most of the headlines since the planned Chinese Q3 GDP release has been postponed amid the country having its 20th Chinese Communist party conference. The kiwi dollar surges against a constructive equity backdrop and a weakening US dollar overall. Core bonds build on yesterday’s gains, confirming our view of some short-term consolidation this week. The Financial Times reported this morning that the Bank of England is likely to delay the sale of government bonds from its balance sheet further until the market becomes calmer without ditching the £80 annual target. It had already moved the starting date once, from October 6 to the end of the month in the midst of the Gilt carnage. Such a decision could help sustain the process of core bonds finding a bottom. On currency markets we hold our view that the US dollar may take a breather. First resistance in EUR/USD pops up at around 0.995. The trade-weighted DXY has some (albeit limited) scope left until it hits support from the upward sloping trendline. Sterling in the meantime completely reversed all losses (and more) following the mini budget. Some further gains are possible short term with Hunt having removed the sting but we remain fundamentally cautious on GBP. Political uncertainty lingers (can Truss hold on to power?!) while the risk of a biting recession increased with the lavish fiscal support plans thrown in the garbage.

News Headlines

•          Inflation in New-Zealand in Q3 stayed much higher than expected. The Q/Q pace of price rises even accelerated to 2.2% from 1.7% Q/Q in Q2, only reducing Y/Y pace of price rises to 7.2% from 7.3% in Q3. An easing to 6.5% Y/Y was expected. Tradeable goods CPI accelerated from 1.9% Q/Q to 2.2% Q/Q. Non-tradeable inflation printed at 2.0% Q/Q up from 1.4%. Growing signs that inflation in New-Zealand is spreading across ever more parts of the economy is putting pressure on the Reserve Bank of New Zealand to decisively continue its hiking cycle. The 2-y government bond yield jumped 7.6 bps and at 4.49% closed at a new cycle top. Markets now see a growing chance of the RBNZ raising the policy rate by 75 bps at the November meeting with potentially two additional 50b bps hikes at the first two meetings of next year. The kiwi dollar tries to regain the NZD/USD 0.57 big figure to be compared with levels near 0.556 at the start of trading yesterday morning.

•          According to Bloomberg, signs of deteriorating liquidity in the US Treasury market are fueling the debate on a Treasury buyback program to help stabilizing the market. In the quarterly survey of primary dealers preparing the financing plan to be announced early November, the dealers were asked the assess the pros and contras of such a program. Earlier last week, US Treasury Secretary Yellen in a speech also addressed the topic of liquidity in the Treasury market.


The ECB ended net asset purchases and lifted rates by a combined 125 bps at the July and September meetings. More tightening is underway but the ECB refrained from guiding markets on the size of future hikes. The correction end of September soon found support at the June high. Germany’s 10-yr yield is retesting the highest levels since 2011 (2.35%) with real rates driving the push higher. Short-term, we expect this resistance level to hold.

The Fed policy rate entered restrictive territory, but the central bank’s job isn’t done yet. The policy rate is expected to peak above 4.5% early next year and remain above a neutral 2.5% over the policy horizon. QT hits max speed. The 10y reached its highest level since 2008 (4.01%). This is acting as a short-term resistance.

EUR/USD is in a strong downward trend channel since February. The dollar remains the main beneficiary of rising US (real) yields in a persistent risk-off context. Geopolitical and recessionary risks are bigger for Europe, holding down the single currency as well even as the ECB finally embraced on a tightening cycle. Resistance stands at EUR/USD 0.9950/1.0050. The YTD low stands at 0.9536.

The new UK Chancellor tossed the mini budget to the bin. It triggered a relief rally in Gilts and to a lesser extent in sterling. Lingering political uncertainty (Truss’ position), yawning twin deficits (despite the fiscal U-turn) and the now greater risk of a biting recession undermines the pound’s attractiveness nonetheless. EUR/GBP 0.86 should survive as a support.

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.

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