Thursday, 24 November 2022
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•          Core bonds rallied yesterday. US Treasuries vastly outperformed Bunds, catching a bid from economic data and the FOMC minutes. US PMIs all fell more than expected and (deeper) into contraction territory. The final reading of the U. of Michigan consumer confidence was slightly better but details are worrying with more than half of the people surveyed expecting inflation next year to surpass income gains. The Fed meeting minutes later revealed that a “substantial majority” of officials support slowing down the tightening pace soon. Fed chair Powell at the November meeting said the terminal rate would likely be higher than previously expected but the minutes were a bit more vague, referring to “various” members coming to this conclusion. Finally, the minutes for the first time since tightening started in March quantified the probability of a recession, giving it an almost 50-50 chance. Together with “some” governors warning for the risk of doing too much, markets saw it as the central bank becoming more sensitive to growth. Daily US yield changes ranged between -3.5 bps (2y) to -9.5 bps (30y) in a thin liquidity environment ahead of the Thanksgiving holiday today. German yields eked out a gain at the front but lost 4.8 bps (10y) further out. European PMIs, while still below 50, unexpectedly rose while price pressures decelerated (materially). The US dollar slipped. EUR/USD advanced from 1.03 towards 1.04. GBP/USD surpassed 1.20 for the first time since August. In a sign of broader sterling strength, EUR/GBP eased to 0.862. The pair briefly lost the upward sloping trendline but then bounced off support around 0.86. BoE chief economist in a late-evening speech said rates need to be increased further as inflation is becoming increasingly domestic. He did repeat that raising above 5% was not likely. Brent oil lost almost 4% after the G7 Russian price cap under discussion is seen as high enough to keep the country’s supplies flowing into the global market.
•          Asian stock markets take heart from yesterday’s price action on US markets. Japan and South Korea outperform. The central bank in the latter raised rates further (see below). News otherwise is scarce. Today’s eco calendar, containing the German IFO business indicator and ECB meeting minutes, is of little importance for trading and there won’t be any guidance from the US. This could set the stage for the ongoing yield correction to continue on European markets. Germany’s 10y yield is at a crucial technical point, risking to snap below the June interim high. The European 10y swap yield already lost that support earlier this week. Dollar weakness lifts EUR/USD beyond the 200MdA and recent highs with next resistance located around 1.05.

News Headlines

•          The Bank of Korea switched back to a 25 bps rate hike this morning, lifting the policy rate to 3.25%, matching the cycle peak from 2011-2012. The central bank mentioned a recent contraction in the short-term credit market (default of local government-backed developer) and an easing of pressure on the won as some of the reasons to slow it down. The US Federal Reserve hinting at a downshift comes in handy as well. The tightening cycle isn’t done yet though with two BoK members advocating a peak rate north of 3.5%. Governor Rhee Chang-yong is aware that the cumulative tightening effect starts weighing on growth. Next year’s growth forecast was downgraded from 2.1% in August to 1.7% while the 2023 inflation prognosis remained broadly unchanged at 3.6%. CPI currently stands at 5.7% Y/Y is expected to remain above 5% for some time. The Korean won outperforms this morning against a generally weak US dollar. USD/KRW drops from 1350 to 1330, more and more leaving behind the multiyear lows for the won just below USD/KRW 1450.
•          The Bank of England announced that it will unwind its financial stability Gilt purchases (£19bn) made between September 28 and October 14 to stop huge sell-off in the wake of lavish fiscal spending plans by the Truss-Kwarteng government. The strategy fits within the BoE framework to winddown its QE bond portfolio, naturally and via active Gilt sales. The BoE intends to operate a demand-led approach sales via a series of reverse enquiry window three times a week starting November 29. To ensure unwind does not trigger renewed dysfunction, the Bank will typically not sell individual gilts which have experienced a significant fall in price ahead of a window.


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. After a first failed attempt, the pair is again trying to pierce through resistance around 1.0341/50/68.

The new UK government’s fiscally conservative approach brought calm to the market, sterling included. But still-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. EUR/GPB 0.86 serves as important support.

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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