Thursday, 19 May 2022
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•          A heavy selling wave on US stock markets eventually reversed intraday weakness on core bond markets while granting the dollar a push in the back. Main US indices ceded 3.6% (Dow) to 4.7% (Nasdaq). Retailers underperformed after weaker-than-expected earnings by amongst others Target. The CFO warned that fuel and freight costs will be $1bn higher than forecast this year, but that the company would absorb the costs rather than raise prices on shoppers. Walmart raised a more or less similar concern thought they already passed some of the price increases to consumers. Home improvement companies like Lowe’s and Home Depot posted small profits, but warned that the amount of shoppers is drying up. All of these clues suggest that Joe Sixpack will start being impacted by the higher cost-of-living as well. We can now firmly label this week’s earlier action as a bear market rally or a dead cat bounce. Action on European and US stock markets this year morphed into a sell-on-upticks pattern. Fast policy normalization (plans), the high inflation environment and feeble growth prospects are responsible. The heavy sell-off generated a safe haven bid into core bonds. US Treasuries outperformed. The US yield curve bull flattened with yields dropping 3.2 bps (2-yr) to 11.4 bps (30-yr). Daily changes on the German curve varied between +1.9 bps (3-yr) and -2.8 bps (30-yr). There will be some catching-up action this morning, though Bunds were underperforming US Treasuries during European dealings as more ECB governors shed their light on the upcoming normalization cycle. ECB Rehn mentioned broad consensus to get rid of negative interest rates relatively quickly, suggesting no pauses once the rate hikes begin. The dollar ended a three-day correction yesterday with the trade-weighted greenback bouncing from an open at 103.34 to a close of 103.81. EUR/USD slid from 1.055 to 1.0464. Only the yen managed to outpace the greenback yesterday with USD/JPY closing at 128.23 from an open at 129.38.
•          Risk sentiment on stock markets will remain the dominant trading theme today. Main Asian benchmarks lose 1% to 2% despite rumours that Chinese banks may cut their benchmark lending rates for a second time this year. Today’s eco calendar contains US weekly jobless claims and Philly Fed Business Outlook. The latter might show similar warning signals as the Empire Manufacturing Survey earlier this week. Minutes of the ECB meeting could be interesting, put probably outdated and no longer influential following the past week’s “coming out” in favour of a July rate hike. Risk aversion favours bonds and the dollar.

News Headlines

•          The Australian labour market added 4k jobs in April. That was below expectations for 30k. A surge in full time employment (92.4k) was partially offset by a decline in part time jobs. The unemployment rate stabilized at the lowest since 1974 (3.9%), despite the meagre jobs growth. A slight decline in the participation rate to 66.3% helped realize that. Hours worked jumped by 1.3% m/m but reflected a bounce back from a flood-affected March. There is still double the amount of people working no or reduced hours due to Covid illness compared to before the pandemic. The outcome eyes mixed but should be seen against an economy near full capacity. It comes after slightly less-than-expected Q1 wage growth and is the last important data ahead of Saturday’s general elections. The Aussie dollar was largely unaffected. AUD/USD recaptures 0.70 but that strengthening move came one hour later.
•          The Russian economy slowed from 5% to 3.5% y/y (vs. 3.7% expected) in Q1 this year, data showed yesterday. Mining, the sector that includes oil and gas, helped spur growth by an 8.5% increase. Economic growth in the country is expected to shrink significantly in the coming quarters following a series of sanctions by the western countries. The Russian central bank has penciled in a contraction of 10% this year. Russian CPI eased to 0.05% week-over-week. That’s the slowest pace since September last year, driven in part by dampened consumer demand. In the aftermath of the Russian invasion on February 24, weekly CPI shot up to more than 2%. USD/RUB marginally weakened 64.36 yesterday and extends losses to 63.66 this morning. It’s the strongest RUB level since early 2020.


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).
These market recommendations are the result of qualitative analysis, incorporating room for past experiences and personal assessments. The views are based on current market circumstances and can change any moment. The most prominent input comes from publicly available data, financial news, economic and monetary policies and commonly used technical analysis.
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