Tuesday, 21 February 2023
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•          Yesterday’s US President’s Day holiday narrowed down trading volumes to an absolute minimum, with European markets going nowhere in absence of any relevant eco data. This morning’s RBA minutes (see News & Views) offer a glimpse of what to expect from tomorrow’s FOMC Minutes as well. The key question being how large the hawkish Fed minority was in favour of sticking to a 50 bps rate hike pace, as suggested by Fed Mester and Bullard last week around. To fill the void until these Minutes, S&P global will serve February PMI surveys today. European gauges are expected to show another modest improvement in both manufacturing (49.3 from 48.8) and services (50.7 from 50.3). Risks are probably tilted to the upside of expectations as the economy and labour market turn out to be more resilient than feared. Simultaneously, they could still see sticky price pressures in the details of the report. Such outcome could reinforce market trends in place since early February. From a market point of view, we think US PMI’s might have the biggest market moving potential. PMI’s over the past month deteriorated both faster and stronger than “comparable” ISM’s. Up until recently, the idea was that ISM’s would converge towards PMI’s. Following this year’s earlier economic releases, the balance started shifting with PMI’s likely painting a too pessimistic picture. The composite US PMI fell below the 50 boom/bust mark in July and remained “under water” ever since. Consensus today expects a marginal improvement from 46.8 to 47.5. Any (substantial?) upward surprises are expected to put new selling pressure on US Treasuries while the dollar’s faith will depend on the stock market reaction. We’ve been proven wrong earlier this year, but stick to the view that higher core bond yields (bond sell-off) will eventually hurt risk sentiment as well, that way supporting USD. The main mechanism through which this will work is when (money) markets start pricing a 50 bps rate hike in March. Key markets remain near important technical levels, suggesting that a break higher won’t be easy. Specifically, the US 10-yr yield tested 3.9% resistance last week, the German 10-yr yield 2.55% resistance and EUR/USD the 1.0650 support area.

News Headlines

•          The Bank of Israel raised its policy rate by a more-than-expected 50 bps to 4.25%. Yesterday’s move brought to policy rate to its highest level since 2008. The Bank of Israel started its hiking cycle in April last year at 0.1%. January inflation printed at 5.4% Y/Y, still holding well above the 1-3% target of the central bank. Deputy governor Andrew Abir stressed that the central bank was determined to bring inflation down. Yesterday’s 50 bps step was justified by ongoing strong growth, a tight labour market and an increase in the broader inflationary environment. The Bank of Israel also cited currency volatility as a factor. Even as it indicates that monetary tightening is working, some further adjustments remains possible depending on the data. The central bank holds its next policy meeting on April 3. The 50 bps rate hike met with critics from foreign minister Eli Cohen. The shekel over the previous month depreciated from USD/ILS 3.35 to currently USD/ILS 3.57. Part of the weakening might be due to uncertainty related to political reforms in the judicial system. A weaker currency might slow the disinflationary process.
•          Minutes of the 7 February policy meeting by the Reserve Bank of Australia showed that the RBA considered both the option to raise the policy rate by 25 bps and by 50 bps. The arguments for a 50 bps increase stemmed from the concern on incoming prices and wages data exceeding expectations, and a risk that high inflation would be persistent. If so, there would be significant costs, including higher interest rates and a larger increase in unemployment later on. Arguments for a 25 bps point increase also recognized the need to bring demand and supply into balance, but noted that inflation was expected to have peaked and that consumption might soften. Monthly meetings provided the Board with frequent opportunities to assess these uncertainties and to adjust policy if needed. In this respect, the MPC opted for a 25 bps hike to 3.35%. Members also agreed that further increases in the interest rate are needed over the months ahead. Contrary to December, the Board didn’t retain the option of keeping the cash rate unchanged. The 2-y Australia government bond yield gains 2 bps this morning. The Aussie dollar (AUD/USD 0.689) eases slightly on a mild broader bid for the USD.


The ECB flagged another 50 bps rate hike in March, accompanied by QT. This clear prioritization to combat inflation initially failed to push the 10-y Bund to the cycle top just north of 2.50%. A strong batch of (US) eco data later served as a global wake-up call. Support at 1.96% survived with a follow-up countermove returning close to the cycle peak. We stick to our view that the depo rate will peak at >=3.50%, implying yields have further room to run.

December dots confirmed the Fed’s intention to raise the policy rate north of 5% and to keep it above neutral over the policy horizon. Markets doubted this guidance as recessionary fears linger. The February policy meeting (+25 bps) again failed to convince them but a stellar jobs report did the trick. The 10y yield is testing 3.90% resistance.

USD lost momentum in Q4. EUR/USD left a downtrend channel improving the technical picture. The euro received support from the ECB’s hawkish twist, lower energy prices and a risk-on sentiment. The pair tested 1.10, but a break failed with the dollar regaining momentum post strong US January data. EUR/USD dropped below support at 1.0735/1.0656, opening the way to the 1.0484 2023 low.

The BoE raised its policy rate by 50 bps in February, but suggested that rates will peak after a final move in March. The UK central bank that way causes a yield disadvantage for sterling, which already has weak structural cards (e.g. weaker growth prospects, twin deficits, long term brexit consequences …). EUR/GBP tries to regain 0.89 resistance. In case of success, there’s little in the way technically towards 0.92.

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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