Wednesday, 23 March 2022
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•          Monday’s post-Powell bond market sell-off simply continued. A 50 bps rate hike (in May) apparently has become the preferred scenario not only for the hawkish wing within the Fed (Bullard, Bostic). Moderates (Mester/Daly) also voiced their support to step up the pace of policy normalization. A strong economy and unacceptably high inflation are building a consensus to frontload tightening and bring the policy rate to/above the neutral level. US yields rose another 4.9bps (2-y) to 8.4 bps (30-y), with all tenors setting new cycle top levels. Interestingly, the curve steepened even as the Fed is stepping up its anti-inflation fight. The rise was driven by a further rebound in real yields, but inflation expectations didn’t ease. ECB members also acknowledged the need to address inflationary risks, but their tone remains less aggressive. Still this leaves to door open for the ECB to leave the era of negative rates by the end of this year. German yields rose between 4.9 bps (2-y) and 1.9 bp (30-y). This rise still was mainly the result of higher inflation expectations. Oil rebounding  above $115 p/b apparently caused some investors to ponder stagflationary risks for the European economy.
The rise in (real) yields and risks to growth still don’t bother equity investors. US indices gained between 0.74% (Dow) and 1.95 % Nasdaq). The EuroStoxx 50 closed 1.14% higher. Given the sharp moves in bond markets, FX markets again was a place of remarkable calm. Fed front-loading/higher short yields at best has only a mixed impact on the dollar. Yen remains an ‘outstanding underperformer’, with USD/JPY currently regaining the 121 barrier. However, the picture in the likes of EUR/USD or cable was balanced (close 1.1029) or even in favour of sterling (cable gaining from 1.317 to 1.326). EUR/GBP tumbled from 0.8366 to close at 0.8316. Markets aren’t convinced that the BoE will be able to maintain last week’s soft guidance with inflation expected to remain elevated for most of this year.

•          Risk sentiment in Asian remains positive, with Japanese (Nikkei +3.0%) and Chinese equities (CSI 1.8%) taking the lead. US treasuries maintain recent losses. The dollar trades little changed (DXY 98.45). The yuan eases further (USD/CNY 6.372). The eco calendar only contains EC consumer confidence.  Markets will look out for new sanctions against Russia as US president Biden meets with allies in Brussels. New sanctions on Russian energy resulting in a higher oil price might cause some market stress but probably won’t trigger fortunes of the bond market sell-off. For now, the dollar (EUR/USD) shows an indecisive picture. Later today, UK Fin Min Sunak will propose its spring budget statement. Only some modest fiscal support to alleviate the cost of living crisis is expected. UK February inflation data released this morning again were higher than expected rising from 5.5% at 6.2% (headline) and 4.4% tot 5.2% (Core). No big directional move of sterling in a first reaction (EUR/GBP 0.8311).

News Headlines

•          The US and the UK agreed to drop Trump-era US tariffs on British steel and aluminum. The Biden administration removes the 25% levy on steel imports of up to 500 000 tonnes a year and the 10% charge on aluminum products of up to about 21 600 tonnes a year. The deal does require any UK steel company owned by a Chinese entity to audit their financial records to assess possible influence from China and share the results with the US. The UK from its side will remove tariffs on US bourbon, agricultural and other goods from June 1st onwards. The updated US-UK trade deal followed earlier pacts with the EU and Japan.
•          Russia’s deputy energy minister Sorokin said that the country needs to repair storm-damaged loading facilities at the Black Sea terminal of the Kazakh-Russian CPC (Caspian Pipeline Consortium) oil pipeline. Oil shipments may drop by as much as 1 million b/d. February data show CPC loadings reached roughly 1.55 million b/d. This corresponds with about 2.5% of global seaborne oil trade. The supply disruption might last up to two months. Storage tanks at the terminal near the port of Novorossisysk can about 6.2 million barrels of crude. Afterwards, Kazakh producers (responsible for 90% of crude flowing through CPC and 2/3 of total Kazakh oil exports) will have to cut output. Brent crude yesterday nearly touched $120/b..


European yields recovered from the setback by the Russian-Ukrainian war. It will slow down growth but didn’t deter the ECB from formally stepping up the normalization plans. QE is to end in Q3 with a rate hike in the next quarter . Real yields may further bottom out while inflation expectations will probably remain elevated. Next resistance stands at 0.58%.

The Fed started its tightening cycle and published an aggressive blueprint for the remainder of the year. A 50 bps rate hike May is likely. The US yield curve extended its bear flattening trend. Plans to shrink the balance sheet will be published in May. Medium term, the sell-off on core bond markets isn’t over.

EUR/USD tested the 1.08 pandemic support zone but survived. A subsequent short squeeze propelled the pair then back to 1.10. The ECB sticking to – accelerating even – the normalization schedule is a (latent) positive for the common currency. It protects EUR/USD’s downside even as the Fed conducted its policy rate lift-off. US (real) policy rates remain deeply negative.

Sterling proves no longer resilient to the uncertain risk environment. Combined with new-found euro vigor, EUR/GBP took out the first resistances between 0.82 and 0.83. A return above 0.845/72 would bring the pair back in the sideways trading range that dominated 2021. Regarding monetary policy, the balance after the March ECB and BoE meetings turned more even, but markets question the BoE’s dovish turn.


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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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