Wednesday, 21 June 2023
Please  click here  to read the PDF version


•          The natural upside drift in yields since last week’s-FED/ECB-meetings ran into resistance yesterday. Disappointment on a smaller than expected reduction in the Chinese prime loan rates and softer than expected German May producer prices (1.4% M/M and 1% Y/Y) were mentioned as a potential driver for the setback in yields. Looking at the intraday price pattern, we’ re not fully convinced on this explanation. Whatever the reason, both yields and stocks were ripe for some repositioning, with UK markets taking the lead after their recent impressive jump in yields. UK yields dropped between 17.6 bps (2-y) and 10.3 bps (30-y). European bonds also rebounded with yields easing between 11 bps (10 & 30y) and 5.3 bps (2-y). The public debate between doves and hawks within the ECB continues. On the dovish side of the ECB-spectrum, Villeroy advocated that inflation in the EMU (and in France) is past its peak and the ECB completed most of its rate hike path. Interesting, he also said that the duration of keeping the terminal rate is more important than specific level to be reached. So, even more dovish oriented ECB members still embrace the higher-for-longer idea. US yields opened higher in Asia/Europe after the long weekend, but were soon captured in the global correction. Very strong US housing data (permits and housing starts) only caused a brief interruption to the bond rebound/risk-off correction. US yields at the end of the day ceded between 2.9 bps (2-y) and 4.1 bps (10 & 30-y). US equities also fell prey to modest profit taking (Dow -0.71%, Nasdaq -0.16%). On FX markets the dollar initially was better bid, but couldn’t maintain gains. DXY closed marginally stronger at 102.54. EUR/USD finished little changed at 1.0918. The yen (temporary) regained some ground after the recent setback (USD/JPY 141.47 from 142+).
•          Asian equities mostly continue yesterday’s correction this morning, with China underperforming and Japan the exception to the rule. The yuan eases further (USD/CNY 7.194). The yen can’t hold on to yesterday’s ‘gain’ (USD/JPY 141,75). Later today, the focus is on Powell’s testimony before the House Financial Services Panel. He can do no other but defend to last week’s hawkish ‘skip’, including the dots showing the MPC preference for two additional rate hikes (peak seen at 5.5%/5.75%). Money markets post-Fed remain very cautious to discount further hikes beyond July. We doubt the Fed-chair will be able to change this wait-and-see bias today. This morning, UK inflation (May) again printed higher than expected. Headline inflation rose 0.7% M/M leaving the Y/Y measure at 8.7%. Core inflation even accelerated further to 7.1% from 6.8%. Sterling gains modestly after the data (EUR/GBP 0.854).

News Headlines

•          The European Commission seeks an additional €66bn from member states for the bloc’s budget. The request follows an overhaul of the 2020-2027 budget framework for the upcoming four-year period (2024-2027). The funds are to cover unforeseen expenses that surpass existing build-in buffers due to rising interest costs, migration and commitments to support Ukraine during the war. For the latter, the EC created a new package totaling €50bn through 2027. Migration is expected to cost an additional €15bn. Borrowing costs at the time EU NextGen was created were estimated around €15 bn for 2021-2027. But that analysis was based on interest rates in the past years and imply a return to average levels by the end of the period from 0% to a mere 1.2%. For next year alone, Budget Commissioner Hahn said interest payments would double to about €4bn. The EC’s request has drawn a backlash from more frugal member states including The Netherlands and Germany, demanding more discipline instead.
•          China’s top three securities newspapers citing analysts said China is likely to cut the reserve requirement ratio and other interest rates further this year. The concerted reporting follows the unexpected rate cut by the PBOC last week but which is unlikely to be enough to jolt a stalling economy. Calls are also growing for targeted fiscal support alongside easier monetary policy. To that end, China this morning extended tax breaks for consumers buying electric vehicles. The wavering of a 10% sales tax on new clean cars has been in place since 2014 and was recently extended through 2023. Today’s announcement pushes that date forward to 2025 and even 2027 for the lower-budget cars.


The ECB hiked by 25 bps in June and announced a similar move for July. Developments in (core) inflation are worrying and rising wages play a key part in it. Rates therefore need to be sufficiently restrictive and for as long as necessary. Considering ongoing ECB hawkishness combined with APP reinvestments fully stopping from 2023H2 on, we expect a solid bottom below European/German yields.

The Fed skipped a rate rise in June but the dot plot suggests two more to come this year with a first move due in July. A pause allows for more evidence on the pass-through of the previous tightening and on the regional bank implosion. The hikes pencilled in signal readiness to act against still elevated inflation and an unexpectedly strong labour market and economy in general. If incoming future data do not disappoint, US yields have room to run higher.

The USD May rally ran its course. The Fed’s awkward pause, even as it is followed by more hikes, marks a stark contrast with the ECB’s decisiveness. EUR/USD overcame several ST resistance levels with the pair now attacking 1.0942 (50% recovery on 2021-2022 decline). This is the final hurdle before returning towards the YtD highs.

The BoE’s conditional rate hike approach comes back to haunt them after April CPI delivered a nasty surprise and the labour market remained red hot. UK money markets expect several more rate hikes this year, pushing sterling to a new YtD high below EUR/GBP 0.855. The short-term momentum in sterling improved, but we stay cautious MLT. Divergency within the BoE about the way forward still might change sentiment on sterling further out.

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.

Register for a 2 week free trial today, pass a Growth, Venture or Rocket Tryout and get a funded prop trading account for upto $120,000.