Friday, 21 April 2023
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•          Recent hawkish repositioning yesterday did run into resistance. The US 2-y and 10-y yield failed to overcome resistance at 4.26% and 3.64% respectively. 3% also proved a too high bar for the German 2-y yield. The correction in yields already started in Europe and accelerated in the US. US jobless claims rose more than expected (245k) and the Philly Fed business outlook unexpectedly declined, supporting a rebound in bonds. In a steepening move, US yields ceded between 10.1 bps (2-y) and 4.6 bps (30-y). Most Fed governors (Mester, Bostic, Harker) ‘implicitly’ supported the case for the Fed hiking by 25 bps in May and then taking a pause to assess the potential tightening of monetary conditions (Mester). German yields eased between 7.3 bps (2-y) and 4.7 bps (30-y). The minutes of the March ECB meeting showed that a big majority supported a 50 bps step at that time. The ECB will keep a close eye at financial stability issues but the focus remains on inflation at the upcoming meeting(s). The decline in yields didn’t help equities. US indices lost between 0.33% (Dow) and -0.8% Nasdaq. The combination of lower yields and a mild equity correction still translated into a modest loss for the dollar. DXY closed near 101.84. EUR/USD finished the day at 1.097. USD/JPY eased from the high to the low 134 area. Oil also declined further (close $81.1) p/b).

•          Asian equities this morning join the risk-off correction on WS yesterday with most indices losing between 0.3% and 1.5%. US yields are declining marginally further (1.0-1.5 bps). The dollar shows no clear directional trend (DXY 101.85; USD/JPY 133.85; EUR/USD 1.096). Later today, the market focus will be on the PMI releases. The EMU composite index is expected unchanged at 53.7. We assume that only a big surprise will have an impact on the ECB assessment. The focus is on the April CPI data and the Lending survey to be published ahead of May meeting. The US composite PMI is expected at 51.2 from 52.3. In the wake of the financial turmoil and given the Fed focus on financial conditions, the market could be more sensitive to a negative surprise in US PMI’s. So, yields might ease a bit further going into the weekend. The dollar still looks fragile. In a ST perspective EUR//USD 1.0909 marks this week’s low with 1.0831 first important support. The topside of the ST range stands at 1.1076.  After stronger/higher than expected labour data and inflation this week, UK retail sales printed on the soft side of expectations (sales ex-auto fuels 1.0% M/M). Sterling is losing marginally in a first reaction (EUR/GBP 0.882).

News Headlines

•          Japanese inflation came in higher than expected in March. Headline prices rose 3.2% y/y, (3.3% in February) amid government subsidies for utilities bills. If it weren’t for the measures, inflation would be about 4.3%. Excluding energy, inflation topped a 3% estimate to come in at 3.1% y/y (same as in February). Stripping the index down to a standard core gauge (ex. energy and food), inflation accelerated from 3.5% to 3.8% (vs 3.6% expected), the fastest since end 1981. The data come ahead of a Bank of Japan policy meeting next week. It’s the first one with the new governor Ueda at the helm. Today’s data pressures the BoJ’s ultra-easy policy stance. Bloomberg, citing sources, reported earlier this week that officials are wary of scrapping yield curve control so soon after the financial turmoil clouded the outlook. But they did add that the final policy decision will be made after assessing economic data and developments in financial markets up until the last moment. Japanese yields remain stoic, with moves confined between a tight -0.8 and +0.8 bps range. The yen appreciates a tad with USD/JPY easing from 134.24 at the open to 133.87 currently. EUR/JPY falls to 146.72 after having rallied almost 5 big figures since early April.

•          UK consumer confidence rebounded by more than expected in April. The GfK index rose from -36 to -30 (-35 expected). It’s the highest reading since February last year and a recovery for a third month straight. The series hit an all-time low in September 2022 (-49) in the midst of the cost-of-living crisis. While there’s still some way to go – confidence is barely better than just shortly after the start of the pandemic – Joe Staton at GfK said that especially the 8 point surge in consumer’s 12 month personal finance prospects is a dramatic change. It suggests that household finances are stronger and withstanding double-digit inflation better than thought. The assessment for the economy the year ahead also improved (-34 from -40) as did the view on buying major purchases (from -33 to -28).


The ECB stuck to its plan to hike the deposit rate by 50 bps in March despite recent turmoil around some regional US banks and Credit Suisse. It provided no specific guidance for the May meeting, but clearly stated that more ground has to be covered if inflation develops as forecast (>2% over policy horizon) and recent uncertainty wanes. Such scenario puts a floor below yields despite the huge amount of volatility.

The Fed delivered a 25 bps dovish hike in March. Uncertainty around the fall-out from the regional bank implosion clouds the outlook. The new dot plot suggests one more final move this year. It does not show rate cuts pencilled in for 2023 but markets beg to differ. ST US yields tanked. Longer tenors suffer from recessionary fears. The 3.3% support area was tested multiple times but survived. A sustained return above 3.50/3.64% would call off the downside alert.

The euro profited from the ECB’s unabated hawkish stance and subsiding energy concerns. The nearing end and expected (by markets) reversal of the Fed cycle meanwhile weighed on the dollar. EUR/USD is challenging the 1.1033 YTD top. A confirmed break technically implies a return to 1.1185.

The usually risk-sensitive pound proved surprisingly resilient during the banking turmoil. The BoE raised rates by 25 bps. A next move higher is still conditional but in any case priced in already. Divergency within the BoE about the way forward contrasts with ongoing hawkish ECB rhetoric. It adds to the already weak structural GBP cards (weaker growth prospects, twin deficits, long term brexit consequences…).

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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