Friday, 21 October 2022
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•          The UK political crisis has demanded its ultimate sacrifice. Liz Truss was forced to resign after being just 44 days in office – the shortest tenor ever. The race for a new PM has already begun and it may be a short one. Contenders need the backing of 100 Tory lawmakers just to get on the ballot. A new leader may already be picked by Monday. Rishi Sunak and Penny Mordaunt are leading in the bookmaker odds with none other than Boris Johnson on the third place. Sterling briefly rallied on Truss’ resignation but closed the day unchanged eventually (EUR/GBP 0.871). Gilt yields rose 3.5 bps (10y) to 9.5 bps (5y), again with the exception of the 30y (-2.9 bps). It was part of the seemingly unstoppable broader trend though. US yields again added 5.3 bps to 9.4 bps to new cycle highs without concrete news other than Fed officials (Harker, Cooke) reiterating the need for additional tightening. US money markets fully price in a 5% terminal rate. German bonds outperformed (and for the first time in days also marginally vs swaps), gaining between 2-3.2 bps across the curve. Wall Street wavered opening gains as yields gained traction in US dealings. On currency markets, USD/JPY broke above 150 triggering nothing else but verbal interventions for now. EUR/USD stayed below 0.98.

•          The greenback is again better bid during Asian trading hours this morning, strengthening further against all G10 peers. USD/JPY rises further north of 150 and USD/CNY is attacking previous (intraday) cycle highs around 7.25. US Treasury yields drift higher. 3% headline inflation in Japan puts Japanese govies under pressure. The BoJ steps in with unscheduled buying. Interestingly, the spread between Japanese 10y swap and the government bond yield is at its highest since at least 2009. Asian equities trade mixed.

•          The economic calendar today contains EMU October consumer confidence and UK retail sales. But the latter will surely be overshadowed by the PM contest. The recent political developments also mean a delay of the fiscal statement beyond October 31. That implies the Bank of England will have its policy meeting without this input early November. Without clear market drivers for today, we expect the current market trends simply to continue: i.e. core bond yields grinding higher and a stronger dollar. Reports of a Russian troop buildup at Ukraine’s borders to the north won’t help equities, which already face difficult circumstances.

News Headlines

•          Both Japan’s headline inflation and core inflation ex fresh Food, in September rose to 3.0% Y/Y. It marked the sixth consecutive month that the ex-fresh food measure printed above the BOJ’s 2% target. Inflation excluding both fresh food and energy also rose to 1.8% y/y from 1.6%. Still the rise in inflation was mainly driven by higher goods prices (5.6% Y/Y). Services prices only gained 0.2% compared to the same month last year. The rise inflation occurs as the yen extends its protracted weakening. At  USD/JPY 150.4, the yen is trading more than 30% weaker against the dollar YTD, putting further upward pressure on price of imported goods. However, BOJ governor Kuroda, who stays at the helm of the BOJ till April next year recently kept the assessment that inflation was mainly cost-driven and that the Bank wants to see higher wages as a sign that inflation is returning sustainably higher. The BOJ will hold its next policy meeting Friday next week.

•          At least two governors of the Czech national bank still keep the debate alive on further interest rate hikes at the next CNB meeting even as it stopped raising rates in June. According to a Reuters article referring to an interview with newspaper E15, CNB Vice governor Mora indicated that he still sees a case for the policy rate (currently 7.0%) to be raised by at least 50 bps as world central banks continue tightening, the domestic labour market remains tight and government fiscal policy stays expansionist. A more transparent policy of further rate hikes could also reduce the need for FX interventions. Yesterday, CNB’s Dedek also indicated that he would raising interest rates further if the koruna would come under pressure. However, for now he doesn’t see narrowing interest rate differentials putting additional pressure on the koruna.


The ECB ended net asset purchases and lifted rates by a combined 125 bps at the July and September meetings. More tightening is underway but the ECB refrained from guiding markets on the size of future hikes. The correction end of September found support at the June high. Germany’s 10-yr yield is retesting the highest levels since 2011 (2.35%) with real rates driving the push higher.

The Fed policy rate entered restrictive territory, but the central bank’s job isn’t done yet. The policy rate is expected to peak above 4.5% early next year and remain above a neutral 2.5% over the policy horizon. QT hits max speed. The 10y reached its highest level since 2008 (4.01%) before staging another leap higher after a few previously failed tests. The next key reference stands at 5.32% (2008 high).

EUR/USD is in a strong downward trend channel since February. The dollar remains the main beneficiary of rising US (real) yields in a persistent risk-off context. Geopolitical and recessionary risks are bigger for Europe, holding down the single currency as well even as the ECB finally embraced on a tightening cycle. Resistance stands at EUR/USD 0.9950/1.0050. The YTD low stands at 0.9536.

The new UK Chancellor tossed the mini budget to the bin. It triggered a relief rally in gilts and to a lesser extent in sterling. Lingering political uncertainty (exit Truss), yawning twin deficits (despite the fiscal U-turn) and the now greater risk of a biting recession undermines the pound’s attractiveness nonetheless. EUR/GBP 0.86 should survive as a support.

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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