Wednesday, 19 July 2023
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•          Dutch ECB member Knot either delivered the most targeted or the most unlucky comments of the month. The ECB hawk took stage just as the blackout curtain was about to drop. Targeted if his aim was to trigger a last-minute repricing on ECB policy rate expectations. Using his hawkish fame to put a more neutral message out. Low volume trading helped amplify moves. Unlucky is he believed that following the party line “data dependent for September” would go unnoticed on a day where the main countdown was to the TDF’s sole ITT. Either way, core bonds gained ground with Europe outperforming. After July, markets discounted a 2nd 25 bps rate hike by the ECB in September or October ahead of the Knot comments. That’s now pushed forward to December. German yields dropped 8 to 13 bps across the curve with the front end slightly outperforming. The German 10-yr yield tests the incoming trend line, connecting March and June lows. The bigger technical test support comes from the 200d moving average (currently 2.3%) which provided support in March, May and June (2x). US Treasuries shadowed the move in European bonds with some additional volatility around the release of June retail sales. They came in mixed with the headline figure (0.2% M/M) below consensus, but upward provisions to May and a better outcome for the retail control group (core sales) providing counterweight. US Treasuries eventually returned close to opening levels during US dealings. Changes on the US yield curve ranged between +2.5 bps (2-yr) and -3.3 bps (30-yr). EUR/USD for a third session straight closed virtually unchanged at 1.1229, this time following a test of key resistance at 1.1274 though (62% retracement on US rise between 2021 and 2022). The pair is showing signs of (technical) topping off.
•          USD/JPY this morning extends gains towards 139.50. BoJ governor Ueda tried to frontrun Friday’s inflation numbers by saying that the whole monetary policy stance remains unchanged unless the premise (price goal view & functioning of bond market) shifted. Sterling cedes ground (EUR/GBP 0.8650) after June inflation numbers finally offer some relief (headline 7.9% Y/Y from 8.7% Y/Y; core 6.9% Y/Y from 7.1% Y/Y). We don’t think that it will be sufficient for the BoE to shy away from a second consecutive 50 bps rate hike early August though. Core bond (futures) profit.

News headlines

•          In an appearance before the budgetary committee of parliament, Vice Governor of the Czech National Bank Eva Zamrazilova said that monetary conditions in the Czech Republic are now sufficiently tight. From now on the question for the CNB MPC is when it will be possible to start easing. This is a change of tone with the policy guidance the CNB held until after the June policy meeting when CNB members warned that market speculation on interest rate cuts could be premature. Zamrazilova repeated that the CNB won’t be able to cut interest rates before it is certain that inflation is really safely heading to 2%. According to the CNB analysis, the strong crown made a significant contribution to current tight monetary conditions, but Zamrazilova now indicated that it could weaken approximately one crown from a current reference level of EUR/CZK 23.88. This is a more pronounced depreciation that expected in the May CNB macroeconomic forecast. The CNB holds its next policy meeting on August 3. At that meeting there will also be a new macroeconomic update available.
•          New Zealand inflation slowed to 1.1% Q/Q and 6% Y/Y in Q2 compared to 1.2% Q/Q and 6.7% in Q1. Consensus expected a more pronounced decline. Especially the monthly dynamics still suggests persistent underlying price pressure. Tradeable inflation rose from 0.7% Q/Q to 0.8% Q/Q. Non-tradeable inflation, seen as a pointer for domestic inflation slowed from 1.7% Q/Q to 1.3% Q/Q (vs 1% Q/Q consensus) resulting in only a marginal decline in the Y/Y measure from 6.8% to 6.6%. In the broader basket, main drivers of quarterly price rises where food, residential construction and rents. The 2y New Zealand government bond yield rose 5.3 bps to 5.24%. Today’s data probably won’t be enough for the RBNZ to openly change its wait-and-see stance after announcing the end of the rate hike cycle in May (5.5%). The kiwi dollar gained temporary after the release but already more than reversed those gains to currently trade near NZD/USD 62.6.


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 (62% 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 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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