Wednesday, 23 November 2022
Please  click here  to read the PDF version


•          Risk-on held the upper hand during an initially choppy trading session yesterday. Stocks finished 0.5-1.4% higher in Europe and the US despite the grim economic picture painted by the OECD. Core bonds gained ground with US Treasuries outperforming Bunds. The likes of Fed’s Mester and George continued to strike a hawkish tone but US markets for now show little appetite to push up the expected terminal rate beyond the 5% currently priced in. ECB’s Holzmann repeated his support for a 75 bps move, based on current data, in December while Nagel said he’ll push for a start of QT early next year. US yields fell 3.8 bps at the front and more than 7 bps from the 5y through the long end. German yields eased no more than 2 bps. The dollar declined across the board. EUR/USD rose from 1.024 to the 1.03 big figure. USD/JPY eased to 141.23, losing one big figure on the day. Sterling’s performance was disappointing given the risk mood. EUR/GBP rebounded from intraday lows near 0.863 after closing in on the Aug-Oct upward sloping trend line to finish marginally higher around 0.867. Brent oil pared gains after testing the $90/b level but still closed slightly higher at $88.36. Bloomberg later reported the EU is likely to water down its sanctions proposal for a price cap on Russian oil by delaying the full implementation and softening key shipping provisions. Gas was not impressed by Europe’s suggestion either to cap prices at €275/MWh, a level only seen in August when prices soared beyond €300/MWh.
•          Asian-Pacific stocks have another green session this morning. South Korea outperforms with an 1.87% advance. Japanese markets are closed. China ekes out a small gain even as violent protests broke out in Zhengzhou. Tensions boiled as the city is now almost one month under tough corona restrictions, highlighting how the zero-Covid strategy is testing its limits. The yuan lost a tad after Bloomberg ran the story. USD/CNY rises to 7.15 currently. The kiwi dollar and yields increase following the RBNZ’s record 75 bps hike and upgraded terminal rate forecasts (see below). Other dollar pairs trade mixed. EUR/USD extends yesterday’s advance to 1.0327 as European investors count down to the November PMIs. Consensus expects a further, controlled decline to 46 for the manufacturing and 48 for the services sector, bringing the composite to 47 (from 47.3 in October). Risks are two-sided with (stagflation) details from the October reading foretelling another weaker-than-expected November figure. But rapidly falling gas prices in recent weeks may have acted as a counterbalancing factor. In the current market environment, any positive surprise in any case would have to be material enough to jolt German/European yields. The reaction in EUR/USD, however, is also dependent on the FOMC meeting minutes, published tonight. US money markets currently have found a short-term equilibrium around a 5% peak policy rate. Investors will be looking for clues whether that’s what Powell had in mind when he said the “ultimate level of interest rates will be higher than previously expected” at the Nov 2 meeting.

News Headlines

•          The Reserve Bank of New Zealand accelerated its tightening cycle this morning, raising the policy rate for the first time by 75 bps, from 3.5% to 4.25%. The central bank agrees that frontloading its actions are necessary to ensure inflation returns to target (2% with 1% tolerance band). Too high core CPI, employment beyond maximum sustainable levels and rising near-term inflation expectations left the RBNZ no other choice. They even contemplated hiking by 100 bps. In its new quarterly monetary policy report, they significantly raised their peak policy rate forecast from 4% to 5.50/5.75% with the peak rate remaining above 5% during fiscal (March) years 2024 and 2025. Inflation forecasts over the policy horizon are raised to 7.5% for FY 2023 (from 5.3% in August), 3.8% for 2024 (from 3.1%) and 2.4% for 2025 (from 2%). The RBNZ is willing to go the extra mile in its inflation fight even as it comes at a significant economic cost: FY 2024 and 2025 growth is expected to average 0.1% (from 0.8% & 1% in August) with the unemployment rate rising to 5.7% in FY 2025 (from 5%). The hawkish RBNZ goes against the market trend of expecting central banks to slow it down to safeguard growth. NZD swap rates rise by 10 bps (20y) to 25 bps (2y) with the curve inverting further. The kiwi dollar fails to profit from the yield support. NZD/USD spike from 0.614 to 0.619 (November high resistance) on the release before paring gains to 0.617.


The ECB ended net asset purchases and lifted rates by a combined 200 bps since the July meeting. More tightening is underway but the ECB refrained from guiding markets on the size of future hikes. Germany’s 10-yr yield rose to its highest level since 2011 (2.5%) before a correction kicked in. Losing the neckline of the double top formation at 1.95% calls for a return towards the 1.82%/1.77% support zone

The Fed policy rate entered restrictive territory, but the central bank’s job isn’t done yet. The policy rate is expected to peak above 5% early next year and remain above a neutral 2.5% over the policy horizon. A below-consensus CPI print strengthened some Fed members call to slow down the tightening pace, triggering a strong correction. The move below the neckline of the double top formation at 3.91% suggests more downside potential.

USD for the largest part of this year profited from rising US (real) yields in a persistent risk-off context. Geopolitical and European recessionary risks kept EUR in the defensive even as the ECB finally embraced on a tightening cycle. EUR/USD left the strong downward trend channel since February. The pair tested resistance around 1.0341/50/68 but failed to push through. A weekly doji pattern arose, suggesting potential losses further ahead.

The UK government had to backtrack on its lavish fiscal spending plans which sent sterling initially tumbling towards the EUR/GBP 0.90+ area. Yawning twin deficits and rising risk premia will continue to weigh on the UK currency longer term. The Bank of England stepped up its tightening with a 75 bps rate hike, but warned simultaneously that UK money market expectations about peak cycle are way too aggressive.

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.