Monday, 24 July 2023
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•          Markets on Friday mostly showed no big swings with investors mainly looking forward to this week’s eco data and central bank decisions. There were no data with market moving potential in the US or EMU. In Japan, CPI (ex fresh food 3.3% Y/Y, ex fresh food and energy 4.2%) was close to expectations. A few hours after the release, headlines from sources reported to have knowledge of the matter appeared on financial news wires indicating that the BOJ was likely to keep its policy of YCC unchanged at this week’s meeting. The comments pushed the yen substantially lower. USD/JPY closed at 141.73 (was 140.30 area before the headlines). UK June retail sales (0.7% M/M) were slightly stronger than expected, but the impact on gilts (changes between -3.9 bps 2-y and +1.7 bps 30-y) and sterling (close EUR/GBP 0.8656) were limited. In the end US yields declined up to 1.5 bps (10-y). German yields eased between 1.6 bps (30-y) and 3.0 bps (2-y). After Thursday’s USD rebound, the dollar remained well bid. DXY gained from the 100.80 area to close at 101.07. The decline in EUR/USD slowed (close 1.1124). US equities didn’t go anywhere (S&P +0.03%). The EuroStroxx 50 succeeded a modest 0.4% gain.

•          Asian markets this morning show a mixed picture with Japan outperforming and China underperforming. With respect to the latter, investors are still pondering the effect from expected additional and monetary stimulus. The yuan today again weakens (USD/CNY 7.194). Treasuries are trading little changed and so does the dollar.
Today, investors will keep a close eye at the PMI confidence indicators. Both the US and EMU composite measure are expected to ease slightly further respectively from 53.2 to 53.0 and from 49.9 to 49.6. We don’t have much reason to take a different view from the consensus for the US. After last month’s rather steep setback in Europe, we assume that enough bad news might be discounted for now. Whatever the outcome, probably a big surprise is needed for markets to place strong directional bets on Fed and ECB policy beyond this week’s decision. In both cases a 25 bps rate hike is a ‘fait accompli’. Most important task for Chair Powell and Lagarde to provide investors with some ‘conditional guidance’ on what is most likely to happen in September. We assume both to firmly keep the option for further tightening open. In such a scenario, especially the downside in short-term yields should be well protected. The dollar rebounded last week, but the technical picture didn’t change in a profound way. EUR/USD holds above the 1.1095 previous top. Short-term, USD gains might become more difficult from here.

News headlines

•          Spanish snap elections yesterday were inconclusive. The early ballot was called by incumbent prime minister Sanchez after his PSOE socialist party suffered heavy losses in May’s local elections. PSOE gained 122 seats in the 350-seat chamber. With support from potential leftwing partners, Sanchez could secure 172 seats, still less than the 176 needed for a majority. The Partido Popular in pre-election polls was projected to become the clear victor but in the end only won 136 seats. With the support of the 33-seat big Vox, a rightwing alliance would deliver 169 of the spots. Technically, Sanchez could remain in power if other smaller parties, including Junts per Catalunya, would abstain in a vote of confidence. But this will probably come with important concessions to the separatist party. An election re-do is therefore the most likely outcome.

•          Japan’s service economy remains on a solid growth track, PMI’s showed this morning. The services series stabilized at 53.9 in July, from 54 in June. Details including new (export) orders and backlogs still showed growth, though weaker than in June, meaning activity was often fueled by the completion of existing orders. Employment fell from growth in a decline. Firms also signaled the softest degree of positive sentiment regarding the year-ahead outlook for activity since the start of the year. Manufacturing  printed slightly deeper in contraction territory, from 49.8 to 49.4. New orders showed a steeper decline, employment weaker growth. The future, year-ahead output outlook was assessed less rosy than in June. Input price pressures in manufacturing eased, suggesting slowing cost inflation, but accelerated in the services sector. In both, however, output price pressures to the end consumer picked up. This may raise pressure on the BoJ to act, even though officials end last week suggested a change to policy at the July meeting this week isn’t likely. The Japanese yen barely reacted to the data with USD/JPY hovering around Friday’s closing levels of 141.53.


The ECB adopted a more gradual approach by slowing its tightening pace from 50 to 25 bps in May. It stated that in the base scenario rates will be brought to sufficiently restrictive levels (i.e. more hikes to follow) and will stay there for as long as necessary. Combined with APP reinvestments fully stopping from 2023H2 on we expect a solid bottom with a potential return to the cycle top, even after recent US-driven bond rally.

The Fed skipped a rate rise in June but the dot plot suggests two more to come this year with a first move due in July. A pause allows for more evidence on the pass-through of the previous tightening and on the regional bank implosion. The hikes pencilled in signal readiness to act against still elevated inflation and an ongoing tight labour market and economy. The rebound in yields ran into resistance after softer June payrolls and June CPI.

The Fed’s awkward pause, even as it is followed by more hikes, marks a stark contrast with the ECB’s ongoing decisiveness. EUR/USD overcame several ST resistance levels and even jumped beyond the 1.1095 YTD top post US CPI. EUR/USD 1.1274 (76% retracement since early 2021 top to 0.9536 cycle low) is the next reference.

The BoE’s conditional rate hike approach comes back to haunt them after April and May CPI delivered a nasty surprise and the labour market remained red hot. Money markets expect several more rate hikes, pushing sterling to a new YtD high. Short-term momentum in sterling improved, but we stay cautious MLT. Divergency within the BoE about the way forward might still change sentiment further out.

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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