Friday, 24 June 2022
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•          The German Bund excelled yesterday. European PMIs showed momentum weakening rapidly and more than expected. High inflation, ongoing supply snarls, uncertainty related to the war in Ukraine and tighter financial conditions heavily weigh on activity, demand and optimism going forward. Money markets adjusted the expected terminal ECB policy rate from 2.5% to 2%. The front-end of the German yield curve outperformed as a result, seeing declines between 24.9 (2y) and 26.1 bps (5y). The 10y lost 21 bps. It forfeited interim support around 1.6%. The key 1.19% level is still some distance away. European swap yields lost between 16.1 (30y) to 27 bps (3y) with key technical support levels remaining intact too. US yields were under pressure too. But thanks to an intraday rebound during US dealings, losses stayed limited to just 3.9-8.5 bps, the belly outperforming. Despite huge interest rate differentials in favour of the dollar, EUR/USD held up pretty well. The pair found support at 1.047 and closed at 1.052 (down from 1.057). The Japanese yen did good, strengthening 1% in a daily perspective but continues to be in the USD/JPY 135 danger zone. UK PMIs stabilized around the 53+ May levels but UK Gilt yields tanked up to 20 bps nevertheless. Sterling withstood the loss in yield support well, appreciating even against the euro. EUR/GBP again dipped sub 0.86. Commodity prices extended a decline with a basket dropping to the lowest level since early April.

•          Asian-Pacific markets put comfort from yesterday’s green finish on Wall Street (up to +1.62%). South Korea outperforms. Core bonds stabilize near Thursday’s closing levels. Japanese headline inflation stabilized at 2.5% in May, providing the Bank of Japan no relieve as it continues its sole journey through monetary easing. The yen trades little changed though. The dollar is being sold across the board. EUR/USD inches towards 1.0545.

•          Sentiment will be key for trading today given the lack of economic data. The dust on core bond markets may settle a bit after the recent correction higher. Looking further ahead, we don’t believe the yield uptrend has ended. An article ran by the Financial Times strengthens our view on this. Consumer and company surveys by Banque de France and the Bundesbank showed rising inflation expectations, also over the medium term. It raises the risk of high(er) inflation staying with us for long(er). Taking into account yesterday’s performance, we think the downside in EUR/USD is better protected now. First meaningful resistance is located at 1.064 (May top, upper bound downward trend channel) but is challenging going into the weekend. UK consumer confidence slumped to a new record low and retail sales disappointed this morning. Especially last month’s sharp downward revision (from 1.4% m/m to a mere 0.2%) catching the eye. EUR/GBP nudges north.

News Headlines

•          The Bank of Mexico raised its policy rate by 75 bps to 7.75%. The decision was unanimous and as expectated. Inflation in the first halve of June printed at 7.88% and 7.47% for headline and core inflation respectively. The Bank of Mexico targets an inflation rate of 3.0% +/- 1ppt. The bank also upwardly revised the path for core and headline inflation which are both forecast to stay slightly above the 3.0% target at the end of the policy horizon (3.1% in Q2 2024). Regarding the next steps the communiqué reads: ‘The board intends to continue raising the reference rate and will evaluate taking the same force full measures of conditions so require’. On the Mexican peso, the Bank assessed recent developments as orderly. The peso yesterday gained marginally to and is testing USD/MXN 20.00.

•          The UK conservative Party in two parliamentary by-elections lost two seats in Parliament. One seat in Southwest England was already held by the conservative party since 1977. Another one in North England was won from labour at the last election. The loss further raises questions on the leadership position of UK prime Minister Johnson after he survived a vote of confidence within his party earlier this week. At the same time, the government also faces a further loss of confidence from consumers as the cost of living crisis spreads further. GFK consumer confidence this morning was reported at the weakest level since the start of the series for the second consecutive month (-41 from -40).


The ECB finally turned the corner in its inflation narrative. The central bank ends net asset purchases this month, facilitating rate hikes from July. Real yields took over from inflation expectations, pushing the German 10-yr yield beyond resistance at 1.13% (2012 & 2013 bottoms) to 1.24% (38% retracement on 2008-2020 decline). The move ran into resistance at 1.9% (50% retracement) before correcting lower. The uptrend remains firmly intact.

The Fed started tightening and published an aggressive blueprint for the remainder of the year. A second 75 bps rate hikes in July is likely. Quantitative tightening will hit max speed by September. Anticipation on even faster Fed tightening pushed the 10-y yield to a new multi-year high of 3.5%. Short-term correction is in store with 2.72% marking a firm bottom.

EUR/USD tested the 2017 low at 1.0341 which survived. The pair (temporarily) rebounded mainly as the broader dollar rally took a pause. However, the 1.0806 resistance still proved one step too far, even as the ECB formally announced to start hiking rates as inflation stays unacceptably high. The persistent (equity) risk-off that supported the dollar has receded somewhat, alleviating immediate downward pressure.

The developing cost-of-living crisis seems to hit the UK economy first and the hardest. Weak economic data toughen the Bank of England’s dilemma in battling inflation with doubts filtering through in markets. Open division within the BoE and the limited room for further tightening pushed EUR/GBP towards 0.872 resistance. The BoE in June signaled it might step up tightening, but it is unsure whether this will change fortunes for sterling.

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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