Monday, 22 May 2023
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•          US Treasuries and German Bunds parted ways on Friday after a joint 10 bps surge the day before. Yields in the US still rose between 1.3-4.8 bps with the belly underperforming. They easily overcame a setback in the first hours of the American trading session, when Fed chair Powell said credit stress may limit the need for new rate hikes. It put the spotlight on a growing FOMC division. Several other Fed governors last week were much less convinced of the idea of such a pause. It also contrasts with the ECB chair on Sunday calling for further hikes: “We are not done yet, we are not pausing based on the information I have today.” German rates headed into the weekend 0.5-2.9 bps lower. The technical charts posed too much of a challenge for the likes of the 10-y (2.5% resistance). This was also true for equities. The S&P500 tested but failed to clear the February high – before the collapse of SVB. European stocks still finished in the green with the EuroStoxx50 taking a shot at high-profile resistance around 4415. This is the post-pandemic recovery and multiyear high of November 2021. The dollar took a breather after its earlier strengthening. EUR/USD rebounded from a 1.076 low to 1.0805. DXY (trade-weighted dollar) eased from the highest level since mid-March (103.58) to 103.2. Sterling consolidated near the strongest levels since December last year. EUR/GBP settled in the high 0.86 area.
•          Asian stocks trade mostly in the green this morning with some minor outperformance in China. News flow is limited and that’s unlikely to change later today. Except from the European Commission’s consumer confidence, the eco calendar is empty. There are, however, a series of ECB and Fed speeches scheduled. They serve as a wildcard for trading. The same goes for the debt ceiling story. There were conflicting messages last week. There was hope talks could land this weekend but so far there’s no breakthrough. President Biden said talks with McCarthy went well and he will continue them today. Core bonds trade a tad stronger this morning. We expect some consolidation near the recent highs ahead of tomorrow’s May PMIs. EUR/USD is trying to extend its bottoming out. The pair is moving a little higher north of 1.08. Sterling keenly awaits those same PMIs as well as Wednesday’s CPI data. The Bank of England is awaiting evidence of more stubborn (services) inflation before hiking further. That leaves the pound vulnerable to a downside surprise in the data.

News Headlines

•          S&P rating agency on Friday affirmed the credit rating of Slovakia at A+. At the same time it raised the outlook from negative to stable. According to S&P, the country has successfully reduced its exposure to Russian hydrocarbon imports and the economy has proved resilient to the effects of the war between Russia and Ukraine. Inflation has remained high and the budget deficit will decline only gradually over the next few years from 5.5% this year. Government measures to support households and businesses increased this year’s government deficit. According to S&P, the political turbulence causes greater uncertainty. However, the rating agency expects that anchors for fiscal and economic policies remain intact. S&P expects 1.2% growth this year and 2.0% growth next year. It expects to government deficit to narrow to 3.6% of GDP by 2026. The net general government debt is expected hovering below 50% of GDP through 2025.
•          The ruling conservative New Democracy came out as victor in the parliamentary elections in Greece this weekend. With about 95% of the votes counted, the party gained about 41% of the votes. The left Syriza party of former prime minister Alex Tsipras secured about 20 % of the votes. However, according to projections of Interior Ministry, New Democracy might obtain 145 sets out of 300 in Parliament, just short of an absolute majority. Prime minister Mitsotakis of the New Democracy Party already indicated that he wants a one-party government. If none of the major party leaders succeeds forming a government, a second election is likely this summer in which the New Democracy Party will seek a majority in Parliament.


The ECB adopted a more gradual approach by slowing its tightening pace from 50 to 25 bps in May. It stated that in the base scenario rates will be brought to sufficiently restrictive levels (i.e. more hikes to follow) and will stay there for as long as necessary. Combined with APP reinvestments fully stopping from 2023H2 on, we expect a solid bottom below European/German yields.

The Fed hinted at a pause after delivering a 25 bps hike in May. The regional bank implosion is expected to additionally weigh on activity. But elevated inflation ties the central bank’s hands in terms of rapid rate cuts. Markets disregard Fed guidance and expect the cutting cycle to start in 2023 H2. Both short and long term yields recovered from the YtD lows to test the upper bound of the sideways trading range.

The euro profited from subsiding energy concerns and the ECB’s policy stance. Even as the latter downshifted the tightening pace, it retains a hawkish upper hand vs. the Fed. Combined with local financial stability concerns, a sustained dollar comeback is unlikely. Failure to break the EUR/USD 1.1095 YtD high triggered a correction action lower.

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…), but sterling tries to fight back.

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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