Friday, 22 April 2022
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•          Yesterday was all about central bank talk. ECB council member Wunsch and vice-governor de Guindos kicked off with some hawkish comments, accompanied later by rumours that several ECB officials will bring a 50 bps rate hike to the table. President Lagarde at the IMF spring meeting pointed at the June meeting as the moment to decide on the next steps. The German curve underwent an impressive bear flattening with yields rising 7.1 bps (30y) to 15 bps (2y). The common currency also received a boost. EUR/USD swung to an intraday high of 1.0936 but ended marginally lower in the end (1.0834). That was not because of the euro suddenly weakening but due to a dollar comeback. Fed chair Powell fully embraced the idea of policy front loading at that same IMF meeting yesterday. US bond yields caught up with European/German ones, rising 10-11.3 bps at the front-to-middle end of the curve. Money markets now fully discount 50 bps hikes for the next two meetings with speculation for a third building (>70% chance priced in). Rates in the UK spiked as well, adding almost 18 bps in the 2y. This followed comments from BoE’s Mann, usually on the dovish side of the spectrum, citing evidence of high inflation filtering into company pricing strategies. In other words: expectations are becoming unanchored. She is contemplating the idea of bigger rate moves. For governor Bailey, the labour market is the central piece. The real income shock will slow growth he said, but question is wether the labour market, and by extension wage growth, will follow. EUR/GBP followed EUR/USD in retreating from intraday highs on sterling strength. The pair eventually closed slightly higher at 0.832.
•          All of that hawkish speech was destined to have repercussions for risky assets. Wall Street fell more than 2% (Nasdaq) and mood on Asian stock markets is sour as well. Japan and Australia underperform (-1.5%). Europe ended off intraday highs but still in the green yesterday. Futures this morning, however, suggest opening losses of 1.7%. The euro is still well bid overall but keeps a tight sideways trading range vs the USD. The Japanese yen is strengthening slightly following a TBS report that US and Japanese Finance Ministers Yellen and Suzuki discussed a joint currency intervention. USD/JPY eases to a still-high 128.17. Currencies Down Under are under quite strong selling pressures. After having heard from the big three (US, UK, EMU) Bank of Canada governor Macklem felt he couldn’t stay behind (see headline below).
•          A whole series of PMI business confidence indicators were/are due today; ranging from Japan over Europe and the UK to the US. Consensus expects them to stabilize at solid (EMU) to strong (UK, US) levels. The Ukraine war last month didn’t affect headline readings that much but it did jolt price pressures and crushed expectations for the year ahead to levels seen in the wake of the pandemic outbreak. Let’s see how much of that was an overreaction. Today’s keynote speech by Lagarde at the Peterson Institute for International Economics will be closely watched too. She is switching places with BoE’s Bailey, who now takes place in the IMF panel to discuss inflation dynamics after having talked at PIIE yesterday. Several ECB members gave the perfect assist over the previous days. Up to Lagarde to finish it today with a goal. But even in case she’d miss, we don’t think European/core bond yields are up for a heavy correction, not even before the weekend where we’ll find out who the next French president is going to be. There’s too much momentum going on.

News Headlines

•          In line with global price trends, Japan’s March inflation continued its uptrend in March. Even so, inflationary pressures in Japan remain modest compared to developments in other (industrialized) countries. The closely watched core CPI measure (excluding fresh food) rose from 0.6% M/M tot 0.8% Y/Y, the fastest pace in 2 years. The headline measure even accelerated to 1.2% Y/Y, a level last seen at the end of 2018. (Core) inflation is expected the ‘accelerate’ substantially further in April as a cut in telecom prices last year will drop out of the Y/Y-comparison and might even cause inflation to reach/surpass the 2.0% threshold in the coming months. Price developments will be an important input as the BoJ meets for a regular policy meeting on Thursday next week
•          As is the case for several other major central banks, the Bank of Canada ponders the idea of frontloading monetary policy tightening even harder. BoC governor Tiff Macklem indicated that the BoC is considering the option of a larger rate increase than the 50 bps hike it executed last week when it brought the policy rate to 1.0%. The comments come after Canada March inflation earlier this week was reported at a much faster than expected 6.7% Y/Y. “We're prepared to be as forceful as needed and I'm really going to let those words speak for themselves.”, Governor Macklem was quoted. The Canadian dollar hardly profits from the comments this morning and holds near USD/CAD 1.26 as the hawkish rhetoric from the BoC governor was counterbalanced by a similar ‘frontloading’ approach from the US Fed (cf supra).


European yields more than recovered from the early stages of the Russian-Ukrainian war. The ECB sticks to ending QE in Q3 with a rate hike increasingly likely in July. 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 symbolic 1% is within reach.

The Fed started its tightening cycle and published an aggressive blueprint for the remainder of the year. Several 50 bps rate hikes are all but certain. 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 more aggressive Fed turned the odds in favour of the dollar even as the ECB accelerated the normalization schedule. EUR/USD temporarily lost support from the 2022 low at 1.0806. But increasingly hawkish ECB rhetoric provided some relief and may even have started the bottoming out process in the run-up to the pivotal early June ECB meeting.

The Bank of England turned more dovish at the March policy meeting. Markets however don’t buy into the cautious normalization approach and several BoE members are starting to have second thoughts as well. 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).
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