Wednesday, 22 February 2023
Please  click here  to read the PDF version


•          US Treasuries went into full sell-off mode again yesterday following February US PMI’s. The composite PMI returned above the 50 boom/bust mark again for the first time since June 2022, surging from 46.8 to 50.2 (vs 47.5 consensus). The spike came on account of a similar move in the services gauge while the manufacturing PMI’s improvement was way more modest (47.8 from 46.9). Despite headwinds from higher interest rates and the cost of living squeeze, the business mood has brightened amid signs that headline inflation has peaked and recession risks have faded. At the same time, supply constraints have alleviated to the extent that delivery times for inputs into factories are improving at a rate not seen since 2009. However, the survey data underscore how the upward driving force on inflation has now shifted to wages amid the tight labor market. A potential wage-price spiral could accelerate service sector price growth, one of the specific items the Fed is following closely. PMI’s can be added to this month’s list of stellar payrolls, stubborn CPI, strong retail sales and hawkish Fed comments. All of which triggered a fierce, and ongoing, repositioning in US money markets. The outcome of the March meeting is becoming fat-tailed towards a possible 50 bps rate hike. Tonight’s FOMC Minutes will give an indication on how big last week’s dissent in favour of such move already in February was. Fed Bullard and Mester already revealed being part of this (outdated?) minority view. After US close, heavyweight NY Fed governor Williams (more moderate profile within FOMC) discusses the inflation outlook. Indications that inflation won’t come down as easily as hoped, won’t go unnoticed. US yields ended yesterday’s session 10 to 15 bps higher with the belly of the curve underperforming the wings. The US 2-yr yield came an inch away of setting a new cycle top (4.73% intraday high). The US 5-yr yield (4.15%) builds on last week’s break above 4.04% resistance which paves the way to the 2022 top around 4.5%. The US 10-yr yield is currently breaking above similar resistance (3.9%) which – if confirmed – opens the path to 4.33%. Yesterday’s bond sell-off spilled to stock markets in an echo to market correlation in the first 9 months of last year. US stock markets lost 2% to 2.5%. The dollar’s performance could have been better in this context (yield advantage & risk-off). EUR/USD closed only marginally weaker at 1.0648. Just as for the stock market, we think it is only a matter of time before the pair cracks as US money markets gradually embrace the 50 bps hike scenario in March. Support kicks in at 1.0484/66 (2023 low/38% retracement on September/February comeback). Sterling profited from rising UK yields (2-y +17 bps) after strong PMI’s suggested that also the Bank of England has more ground to cover in its normalisation cycle. EUR/GBP is testing first support around 0.88. EUR/GBP 0.8722 will be a tough nut to crack.

News Headlines

•          The Reserve Bank of New Zealand today raised its policy rate (OCR) by 50 bps to 4.75%. The Committee agreed that the OCR still needs to increase, as indicated in the November Statement, to ensure inflation returns to within its target range over the medium term. (Core) consumer price inflation remains too high, employment is still beyond its maximum sustainable level and near-term inflation expectations remain elevated. There are early signs that demand is easing but it continues to outpace supply as reflected in strong domestic inflation (7.2% headline). The RBNZ expects that inflation will stay high in the near term and is likely only to begin decline significantly from the second half of 2023. The central bank indicated that it is too early to accurately assess the monetary policy implications of recent disrupting weather events. In its monetary policy statement the RBNZ still sees the peak in the OCR at 5.5% toward the end of this year. The hawkish tone from the RBNZ communication caused the 2-y government bond yield to rise 10 bps. The kiwi dollar jumped from NZD/USD 0.621 to 0.06245, but gains eased on broader USD strength.
•          The Australian Bureau of Statistics released data showing wages in the country rising by 0.8% Q/Q to be up 3.3.% Y/Y. (from 1.1% and 3.2% in Q3). While the 3.3% yearly pay growth was the highest since Q4 2021, markets still expected a bigger increase to about 3.5%. The Q4 pay growth was also slightly lower than the expectations of the Reserve bank of Australia. After taking a softer stance end last year, the RBA recently indicated that it will have to raise rates further to bring inflation back to target. However, softer-than-expected wages this morning triggered a correction on the recent rise in yields. After touching a new cycle top at 3.69%, the 2-y government bond yield dropped back to 3.57%. The Aussie dollar also loses further ground trading at around AUD/USD 0.6835.


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 refused to follow this guidance up until the wake-up call coming from this month’s eco data. The US 10-yr yield is currently testing final resistance ahead of the 2022 cycle top (4.33%) at 3.9%.

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 for now avoided a return above 0.90 as UK eco data suggest that the BoE has more ground to cover as well.

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.