Vendredi, 24 février 2023
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•          The German and US 10-yr yield failed to clear key resistance this week, triggering some return action lower yesterday. We’re talking about 2.55% for GE (2022 top & 38% retracement on 2008/2020 decline) and 3.9% for US (neckline double bottom & previous support as neckline of double top; see graphs). A well-received 7-yr Note auction helped US Treasuries in the end as well. Changes on the US yield curve ranged between +0.4 bps (2-yr) and -3.8 bps (10-yr). German yields lost 1.1 bp (2-yr) to 4.3 bps (10-yr) with the 30-yr’s outperformance related to a syndicated tap (€4bn 1.8% 2053). US stock markets closed the session around 0.5% firmer while EUR/USD failed to profit from a better risk climate. EUR/USD closed at 1.0596. Today’s eco calendar contains PCE deflators, but they are unlikely to show big surprises following CPI’s earlier this month. This context suggests that core bonds might find a bid going into the weekend. Next week’s EMU CPI numbers and US ISM surveys are the following references.
•          All eyes turned to Japan this morning, where BoJ governor-nominee Ueda appeared for a parliamentary hearing in his first public remarks since his appointment to replace current governor Kuroda at the helm of the Bank of Japan when his term ends in April. Ueda managed to keep a very balanced approach, saying the central bank’s current easing is appropriate, while simultaneously stating the obvious that the BoJ will inevitably have to think about a review of yield curve control or a move in the direction of policy normalization if another clear step up in improvement in the outlook for price trends comes into sight. Markets have been pondering about the timing of this watershed moment ever since the BoJ unexpectedly doubled the tolerance band around the 0% target for the 10-yr yield from 25 bps to 50 bps in December of last year. It becomes harder and harder for the central bank to turn a blind eye to inflation dynamics. This morning’s January national inflation figures showed the headline reading rising from 4% Y/Y to 4.3% Y/Y while underlying core inflation (ex fresh food) accelerated from 4% Y/Y to 4.2% Y/Y. Both are the highest levels since the early ‘80s and are more than double the BoJ’s inflation target. The central bank (under Kuroda) kept the view that inflation remains cost-driven and that it probably peaked last month as government support measures kick in (utility subsidies). This morning’s market reaction is extremely muted. The Japanese yen showed some volatility, but holds near yesterday’s closing levels (134.6-area). Short term, we expect the pair to have more upward potential. The greenback on the one hand gets interest rate support with markets discounting higher rates for longer. On the other hand it remains too soon to frontrun the U-turn by the BoJ. First resistance kicks in around 136.67 (38% retracement on October to January decline). Japanese bond yield fall 0.4 bps (2-yr) to 3.9 bps (20-yr) with the curve bull flattening.

News Headlines

•          GfK’s UK consumer confidence indicator for February came in at -38. While still close to historic lows, the February recovery was the biggest since March 2021 (+7 points). The improvement was across the board with personal finances and the economic situation for the year ahead climbing further out of the troughs set in September last year. Saving intentions moved closer to the highs seen in recent years. Falling energy bills and inflation in general, though still high, showing signs of having peaked is boosting consumer morale and may lead towards continued spending at a time the Bank of England is actually trying to dampen it. The data follow a stronger-than-expected PMI rebound on Tuesday. The pound strengthens marginally ahead of the European open (EUR/GBP 0.8815).
•          The kiwi dollar is one of the better performers in the G10 landscape this morning, eking out a small gain vs the likes of the US dollar (NZD/USD at around 1.60). The Reserve Bank of New Zealand’s assistant governor Silk struck a hawkish tone in a Bloomberg interview. The central bank lifted policy rates by 50 bps to 4.75% earlier this week while sticking to an expected 5.5% terminal rate. Silk said that there is still excess demand, a tight labor market and inflation remains well above target. Referring to the fiscal side of the economy (eg. government support for rebuilding after the passing through of cyclone Gabrielle), risks to the inflation outlook and the policy rate are to the upside. She kept all rate hike options (25, 50, 75 bps) on the table for the next meeting, adding that it will depend on the information then at hand.


The ECB flagged another 50 bps rate hike in March, accompanied by QT. This clear prioritization to combat inflation initially failed to push the 10-y Bund to the cycle top just north of 2.50%. A strong batch of (US) eco data later served as a global wake-up call. Support at 1.96% survived with a follow-up countermove returning close to the cycle peak. We stick to our view that the depo rate will peak at >3.50%, implying yields have further room to run.

December dots confirmed the Fed’s intention to raise the policy rate north of 5% and to keep it above neutral over the policy horizon. Markets refused to follow this guidance up until the wake-up call coming from this month’s eco data. The US 10-yr yield is currently testing final resistance ahead of the 2022 cycle top (4.33%) at 3.9%.

USD lost momentum in Q4. EUR/USD left a downtrend channel improving the technical picture. The euro received support from the ECB’s hawkish twist, lower energy prices and a risk-on sentiment. The pair tested 1.10, but a break failed with the dollar regaining momentum post strong US January data. EUR/USD dropped below support at 1.0735/1.0656, opening the way to the 1.0484 2023 low.

The BoE raised its policy rate by 50 bps in February, but suggested that rates will peak after a final move in March. The UK central bank that way causes a yield disadvantage for sterling, which already has weak structural cards (e.g. weaker growth prospects, twin deficits, long term brexit consequences …). EUR/GBP for now avoided a return above 0.90 as UK eco data suggest that the BoE has more ground to cover as well.

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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