Friday, 19 August 2022
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•          An avalanche of Fed members hit the wires yesterday, especially during US trading hours. Voting member St.-Louis Fed Bullard argued in favour of a third consecutive 75 bps rate hike in September. In a WSJ interview, he vows to continue to move expeditiously to a level of the policy rate that will put significant downward pressure on inflation. He is a fan of frontloading tightening, with the policy rate at a restrictive level of 3.75%-4% by year-end. Bullard argues that continuing the cycle on the next three meetings should be taken for granted. Afterwards, the Fed should re-evaluate the state of the economy and inflation dynamics to consider how to move forward in 2023. If one thing is sure, he believes that market speculation over rate cuts is definitely premature. Bullard fears that high inflation will prove more persistent than what many parts of Wall Street think. On top, he errs on the optimistic side of expectations when it comes to H2 2022 growth on the back of the strong US labour market. Non-voting SF Fed Daly said that she was open to raising rates by 50 or 75 bps next month and underlined that the Fed wasn’t in a hurry to reverse course next year. Non-voting Minneapolis Fed Kashkari wants to tackle the Fed’s inflation problem right now. He stressed that economic fundamentals are strong and wants to get down inflation urgently. Voting Kansas City Fed George is in favour of slowing down the tightening pace, mainly because of the lagging impact on inflation from the Fed’s actions. She already dissented in June, in favour of a smaller rate hike. Nevertheless, when it comes to the terminal interest rate, she doesn’t want to talk about a stopping point yet as the Fed has to be completely convinced that inflation is coming down. Markets at the moment seem to turn a deaf ear to the new vigilance coming from Fed members. They discount an additional 125 bps (3.5%-3.75%) of tightening by year-end and that’s about it. US money markets even discount a 25 bps policy rate cut by end 2023. This suggests that we might see more hawkish repositioning next week in the sidelines of the Jackson Hole symposium (Aug 25-27). This year’s topic is “reassessing constraints on the economy and policy”. Fed Chair Powell was yesterday confirmed as speaker on August 26. He will share his views on the economic outlook.
•          US Treasuries yesterday even outperformed German Bunds and UK Gilts. US yields dropped by 1.6 bps (30-yr) to 8.5 bps (2-yr). The German and UK yield curves bear flattened on the contrary with yields up around 5 bps at the front end and marginally higher at the very long end of the curve. In FX space, the dollar outpaced the euro which on his turned performed better than sterling. Relative yield dynamics are void at the moment as trading theme. EUR/USD yesterday fell below the 1.01 big figure. We tend to argue in favour of more USD strength going into the Jackson Hole gathering. EUR/GBP flipped sides around the 0.8450 mark. The pair is currently testing the topside of the corrective downward trend channel since mid-June. This morning’s better than expected UK retail sales (0.4% M/M for core) don’t immediately come to sterling’s rescue. Today’s eco calendar is empty. Apart from the Fed symposium, market keep next week’s EMU PMI’s in the back of their minds.

News Headlines

•          UK consumer confidence (GfK, growth from knowledge) fell to a new record low of -44 in August. GfK has been tracking consumer confidence since 1974. All measures declined (personal financial situation over last/over next 12 months, general economic situation over last/over next 12 months and major purchase index), reflecting acute concerns as the cost-of-living soars. A sense of exasperation about the UK’s economy is the biggest driver of these findings. GfK Client Strategy Director Staton says that the crisis of confidence will only worsen with the darkening days of autumn and the colder months of winter.


The ECB ended net asset purchases and lifted rates with a 50 bps inaugural hike. More tightening is underway but the ECB refrained from guiding markets on the size of future hikes. Germany’s 10-yr yield broke out of the corrective downward trend channel since mid-June, suggesting more upside short term.

The Fed hiked to neutral by a back-to-back 75 bps in July. The size of future moves depends on the incoming data. QT will hit max speed by September. The 10y briefly dropped below the lower bound (2.70% area) of the sideways trading range, but a sustained break lower was averted.

The euro zone’s (energy) crisis is being accompanied by an Italian political crisis. Growing recession fears hammered EUR/USD below the 2017 low of 1.0341. Parity was tested before a technical (USD-driven) correction higher kicked in. A tactical dollar pause is at hand but the euro remains strategically under pressure. It takes a return above EUR/USD 1.035 to call off the immediate downside alert.

Sterling’s strong run going into the BoE meeting of August abruptly ended. The central bank hiked by 50 bps. More hikes are likely given stellar inflation, but have been priced in already. Combined with the BoE’s grim economic assessment it triggered a profit-taking move with short-term EUR/GBP upside potential to 0.8512. Euro weakness remains a risk acting as an opposing force

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). Read the full disclaimer.

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