Tuesday, 23 August 2022
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•          The new surge in European gas prices extended the core bond sell-off yesterday. They worsen the inflation outlook with central banks not blinking to increased recession risks and favoring frontloading policy normalization/tightening in their inflation crusade. The Dutch benchmark future (TTF) moved above the March peak (early stages Russian war in Ukraine). European bonds underperformed US Treasuries. German yields added 4.7 bps (30-yr) to 8.9 bps (5-yr). The breakdown of the 10-yr yield movement showed inflation expectations responsible for the lion share of yesterday’s move. German inflation expectations move above 2.5% for the first time since early May. EU swap rates underperformed bonds with the curve bear steepening. Swap rates added 6.8 bps (30-yr) to 14.8 bps (2-yr). Changes on the US yield curve varied between +1.3 bps (30-yr) and +9.1 bps (3-yr) with the curve turning more inverse again. The US 10-yr yield passed the 3% mark for the first time in a month. The fierce sell-off in core bonds spilled again to the equity market with European indices losing up to 2% and US gauges even closing up to 2.5% lower. Rising European inflation expectations and a global risk-off climate pulled EUR/USD one big figure lower, losing parity for a second time this year. We think that the break will this time be sustained. The pair set a new sell-off low this morning around 0.9920. The technical downward trend channel since February suggests more downside towards 0.97. USD/JPY moved to 137.50 with the YTD high at 139.39. Cable suffers a more or less similar faith as EUR/USD with GBP/USD testing the YTD low at 1.1760. EUR/GBP for now failed to regain the 0.85 big figure with the test of the incoming downward trend line ongoing.
•          We expect ruling trends to continue today (stronger dollar, weaker bonds and lower stocks). Even weak August EMU PMI’s probably won’t come to ailing bonds’ rescue. For EUR/USD’s demise, they just risk adding fuel to the fire. UK and US PMI’s will be released as well, but might have less market influence. Ahead of Fed Powell’s Jackson Hole speech, more repositioning on the money market is likely as well with the 2023 rate cut idea still not abandoned. We expect Powell to stress the need for frontloading with the December meeting offering a recalibration point to set out the 2023 framework. Even higher and stable rates are the most likely outcome in our view. ECB executive board member Panetta speaks in an ECB policy panel in Milan. It will be interesting to see whether the Italian follows recent German views in favour of pursuing an aggressive tightening cycle.

News Headlines

•          In an answer to questions from Bloomberg News, Saudi Arabian Energy Minister Price Abdulaziz Bin Salman indicated that recent extreme volatility and the lack of liquidity in the futures oil market are signs that the futures market is increasingly disconnected from underlying fundamentals. The Oil minister also blamed ‘unsubstantiated’ information about demand destruction, confusion about sanctions, embargoes and price caps as driving the recent decline in oil prices, while he still sees high risk of supply disruptions and thin global spare capacity. According to the Saudi Oil Energy minister OPEC+ has the means to address current problems by cutting production going forward. Brent oil yesterday reversed an initial drop below $93/b to close the session slightly higher near $96.5/b.
•          According to the Valueguard HOX index, Swedish Home prices declined for the fourth consecutive month in July. Prices declined 2.9% M/M to be 2.6% lower compared to the same month last year. Given the high levels of private debt in Sweden, the Riksbank already several times warned for the stability risks of higher inflation and higher interest rates. The Swedish krone this month underperformed other pears with EUR/SEK rising from the 10.35 are mid-August to currently trade near 10.65.


The ECB ended net asset purchases and lifted rates with a 50 bps inaugural hike. More tightening is underway but the ECB refrained from guiding markets on the size of future hikes. Germany’s 10-yr yield broke out of the corrective downward trend channel since mid-June, suggesting more upside short term.

The Fed hiked to neutral by a back-to-back 75 bps in July. The size of future moves depends on the incoming data. QT will hit max speed by September. The 10y briefly dropped below the lower bound (2.70% area) of the sideways trading range, but a sustained break lower was averted. The focus is back central bank frontloading to tackle inflation.

The euro zone’s (energy) crisis is being accompanied by an Italian political crisis, weighing down the euro. Hawkish Fed comments going into the Jackson Hole gathering and the simultaneous sell-off in bonds & equities push the euro to new sell-off lows below parity. This year’s downward trend channel suggests more downside.

Sterling’s strong run going into the BoE meeting of August abruptly ended. The central bank hiked by 50 bps. More hikes are likely given stellar inflation, but have been priced in already. Combined with the BoE’s grim economic assessment it triggered a profit-taking move . EUR/GBP is trying to exit the corrective downward trend channel since mid-June.

Calendar & Table

Note: All times and dates are CET. More reports are available at KBCEconomics.be 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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