Thursday, 21 April 2022
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•          Economic data during yesterday’s trading day was limited to US housing data (see below). The Fed’s Beige Book held all the anecdotical evidence one could have expected: a tight labour market and strong inflationary pressures. Districts saw the economy still growing at a moderate pace but mentioned that geopolitics were clouding the outlook. Turning to markets, European stocks had a good run. The EuroStoxx50 rose 1.7%. Wall Street ended mixed with the Nasdaq underperforming (-1.22%) on some individual slip-ups (Netflix, woops). Core bonds corrected higher after a rocky session on Tuesday. US Treasuries outperformed in a bull flattening move. Yields slid 1.6 bps in the 2y to 12.9 bps in the 20y tenor with bonds in the latter bucket profiting from a very strong auction. The $16bn reopening was awarded at 3.095% compared to a 3.125% WI yield. Indirect bidders’ share jumped to 75.9%, highlighting very high (foreign) demand. Bid-to-cover was a record 2.80. European swap yields eased between 7 and 9 bps in the 10-30y segment. Declines at the front-end stayed limited to 2-3 bps and were even less intraday after ECB’s Kazaks and especially German heavyweight Nagel both suggested a rate hike is possible as soon as July. Their comments supported EUR/USD (finished at 1.085, up from 1.078) to some extent, but the bulk of the move came on the account of the dollar. The greenback lost against all major peers, including the ailing Japanese yen. USD/JPY snapped a 13-day winning streak to close at 127.86, down from 128.91. Cable (GBP/USD) rebounded from the 1.30 support area to 1.3068. The euro did keep the upper hand against sterling, rising back above 0.83 but without strong conviction. Among the smaller currencies, the Canadian loonie and Swedish krone stand out. Both gained as higher-than-expected inflation in Canada paved the way for more double-sized hikes by the BoC while Riksbank governor Inges turning the April meeting into a live one.
•          Asian dealings are pretty quiet. Stock markets trade mixed with Japan (+1.3%) and China (-2%) marking both ends of the spectrum. Core bond yields already recoup some of yesterday’s losses. The US adds 4-5 bps. On currency markets, the Japanese yen and Swiss frank trade on the back foot. Japan’s Finance Minister Suzuki’s verbal interventions, including those this morning, have less effect by the day. EUR/USD rebounded intraday to trade near yesterday’s closing levels after Belgian ECB governor Wunsch joined the hawkish parade led by Nagel and Kazaks. He said policy rates could turn positive this year. The kiwi dollar trades a tad lower after inflation rose but by less than expected (see below).
•          The eco calendar contains US weekly jobless claims and European consumser confidence (April). However, after the recent string of hawkish ECB speeches, we’re very keen to what president Lagarde has to say. Together with Fed chair Powell she takes part in an IMF panel on the global economy tonight. Tomorrow she’ll give a keynote speech at the Peterson Institute for International Economics (PIIE) where she will undoubtedly dive into monetary policy. A clear and concrete hint towards a more rapid normalization will definitely be noticed, both by rates and the euro. EUR/USD returning above 1.0954 would ease some of the immediate downward pressure but the first high-profile reference is located at 1.1121. Also keep an eye at sterling today. The PIIE also invited Bank of England governor Bailey to touch upon economic and monetary policy tonight. Will he still hold the line of a cautious normalization approach with inflation having run at a consensus-beating 7% in March?

News Headlines

•          Inflation in New-Zealand in the first quarter accelerated to 1.8% Q/Q and 6.9% Y/Y (was 1.4% Q/Q and 5.9% Y/Y in Q4 2021), reaching the highest level since the second quarter of 1990. The RBNZ aims to keep inflation within a 1.0%-3.0% target range. Inflation excluding food, fuel and energy prices rose 5.9% Y/Y from 5.4%. Even as inflation was visible in a broad range of product groups, the Y/Y measure was slightly below market expectations for a 7.0%+ figure (headline). Last week, the RBNZ frontloaded policy tightening, raising its policy rate by bigger than expected 50 bps to 1.5%. Today’s inflation data suggest that further tightening is needed. Markets still see a 80% probability of the RBNZ continuing with a 50 bps rate hike at the May 25 meeting. The 2-y yield eased 4 bps to 3.10%. The Kiwi dollar in a first reaction also lost modest ground slipping below the NZD/USD 0.68+ handle. However, the move doesn’t  go far (currently 0.6790).
•          US existing home sales in March dropped by 2.7% M/M, the second consecutive decline after an strong monthly decline of 8.6% M/M in February. The decline brought the SAAR of sales to 5.77m, the lowest level since June 2020. However, other parts of the report showed that the market remains tight with median price of an existing home rising 15 % Y/Y to a record high of $375 300. Inventories rose modestly but remain tight and houses mostly only remain on the market only for a brief period of time. Even so, going forward higher mortgage yields might come in play. Mortgage applications for the week ending 15 April declined another 5.0%, the sixth consecutive negative reading.


European yields (more than) recovered from the early stages of the Russian-Ukrainian war. The expected growth slowdown doesn’t deter the ECB from stepping up the normalization plans. QE is to end in Q3 with a rate hike already possible in the same quarter. The trend in yields remains north. The German 10-y yield surpassed the 0.80% 2018 top, marking the entrance of a new European bond era.

The Fed started its tightening cycle and published an aggressive blueprint for the remainder of the year. Several 50 bps rate hikes are likely. The US yield curve initially developed a bear flattening trend. However, bold plans to shrink the balance sheet ($95bn/month) also support yields at longer maturities.

The ECB accelerating the normalization schedule triggered a test of first resistance at EUR/USD 1.1121. A sustained break higher didn’t occur. The more aggressive Fed turned the odds in favour of the dollar instead. EUR/USD fell out the closing triangle and lost support from the 2022 low at 1.0806. The pandemic low of 1.0638 remains the next downside reference.

The Bank of England turned more dovish at the March policy meeting. Markets however don’t buy into the cautious normalization approach. Sterling still holds the upper hand. Since April, EUR/GBP slid almost non-stop. The pair tested the 2022 (closing) low.

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.
The KBC Economics – Markets desk has used reasonable efforts to obtain this information from sources which it believes to be reliable but the contents of this document have been prepared without any substantive analysis being undertaken into these sources.
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