Tuesday, 20 September 2022
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•          The new week didn’t bring any change to market trends/narrative going into multiple central banks decisions, including the FOMC announcement on Wednesday. Markets continue to prepare for (or is it rather push?) inevitable bold central bank action to finally break a stubborn inflationary dynamic. Curve inversion/flattening trends continued unabatedly.US yields rose between 6.9 bps (2-y) and 0.2 bps (30-y), with the 10-y US real yield building on its break beyond 1.0%. EMU swaps showed similar gains rising between 8.8 bps (2-y) and 3.7 bps (3.7%).Yields at shorter maturities aren’t hampered anymore by nearby technical barriers and continue to set multi-year peak levels on a daily basis (2-y US 3.96%, highest since 2007; EMU 2-y swap 2.61%, highest since 2019). Yields at longer maturities are close but continue to struggle to clear the cycle highs touched earlier this year. The US 10-y yield yesterday briefly surpassed the 3.5% cycle top (close 3.49%). EMU 10-y swap closed at 2.57% vs 2.72% (intraday June peak). The intraday dynamics yesterday suggested that the upside drift at least as much originated from Europe rather than the US. Initially, higher (real) yields put further pressure on equity markets with major indices near important support levels. Selling pressure eased during US trading. The EuroStoxx 50 closed almost unchanged. US indices even closed moderately higher (Dow +0.64%/Nasdaq +0.76%). The dollar again ‘decoupled’ from a persistent fragile risk sentiment and expected bold Fed action. The DXY index (close 109.74) even finished a few ticks lower compared to Friday. EUR/USD overcame some initial weakness to close at 1.002. USD/JPY maintained a sideways trading pattern to close marginally stronger at 143.20.

•          Asian (equity) markets are joining the more constructive close on WS yesterday. US yields stabilize. The dollar is trading marginally softer (DXY 109.58). Japanese inflation (Cf infra) surprised on the upside, but for now doesn’t change expectations on BoJ policy in a profound way yet (USD/JPY unchanged at 143.2). Later today, the eco calendar is thin. US building permits and housing data are expected to confirm a deteriorating momentum (Cf further decline in NAHB home builders confidence yesterday). Data probably won’t support the established trend in yields. That said, the uptrend recently didn’t need much concrete news. The dollar found a short-term equilibrium going into the Fed policy decision with 0.9864 and 1.02 the borders for EUR/USD’s consolidation pattern. Yesterday’s close of the UK markets didn’t help sterling much. EUR/GBP’s break above 0.8721/31 looks confirmed. The Swedish Riksbank will likely double its policy rate to 1.50% this morning. The risk, if any, is for even bolder action.

News Headlines

•          Japanese inflation accelerated to its highest level since the early 90s in August (when excluding periods around sales-tax hikes). The August headline national CPI quickened from 2.6% Y/Y to 3% Y/Y (vs 2.9% expected) while the BoJ’s preferred gauge excluding fresh food increased from2.4% Y/Y to 2.8% Y/Y. Food and energy prices are still the main culprit from the upward price pressure, but imported goods and services contributed as well. Inflation momentum makes it hard for Bank of Japan governor Kuroda to keep defending its ultra-easy monetary policy. The BoJ sticks with its negative policy rate policy while defending the 0.25% yield cap at the 10-yr tenor. They want to help the sinking yen by (verbally) intervening. Lack of interest rate support and high energy prices pushed the Japanese currency to multidecade lows near USD/JPY 145 of late.

•          Minutes of the Australian central bank meeting earlier this month showed that the RBA contemplated a smaller rate hike than the 50 bps move it eventually conducted (to 2.35%). Eventually they opted for the higher pace given the importance of returning inflation to target, the potential damage to the economy from persistent high inflation and the still relatively low level of the cash rate. The RBA stressed that it remains on tightening course, but a return to more normal settings could imply a slower tightening path going forward. AUD swap rates lose 4 bps (30-yr) to 6.5 bps (2-yr) this morning. The Aussie dollar is a tad weaker at AUD/USD 0.6715 and stays near the YTD low at 0.6670..


The ECB ended net asset purchases and lifted rates with a 50 bps inaugural hike and a 75 bps follow-up move. 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. The YTD high at 1.93% comes into play.

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 hits max speed. The 10y briefly dropped below the lower bound (2.70% area) of the sideways range, but a sustained break lower was averted. The 3.50% barrier is under test as the focus is back on Fed frontloading to tackle inflation.

EUR/USD is in a strong downward trend channel since February. Last week’s hawkish ECB meeting, attempts to tackle the energy crisis and a risk rebound gathered some euro-momentum. The upper bound of the downward trend channel kicks in as first resistance around 1.0150.

The Bank of England hiked by 50 bps in august. More hikes are coming but are priced in already. Combined with the BoE’s grim economic assessment it triggered a profit-taking move. EUR/GBP broke out of the corrective downward trend channel since mid-June and extended gains beyond the key 0.8721 YTD level. 0.8866 is next reference on the charts.

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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