Monday, 25 April 2022
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•          The second half of last week was marked by a hawkish market repositioning with regard to the timing and the number of future ECB rate hikes. Several ECB governors broke ranks with President Lagarde’s official communication following the April policy meeting. Lagarde supposedly asked them to wait at least a week before doing so. The governors all named the July meeting, our favorite, as potential lift-off date. The 3-month Euribor forward curve bear steepened between now and end 2023 with yields rising 25 bps from the Sep2022 contract onwards. A 15 bps July rate hike is now discounted. Dec2022 and Dec2023 contracts trade at 0.6% and at 1.76% respectively. The money market is thus shifting towards consecutive policy rate hikes at every meeting in H2 2022 (#4) with the expected policy rate peak evolving towards 2%. The German yield curve extended its bear flattening move with yield changes ranging between flat (30-yr) and +8.8 bps (2-yr). The German 10-yr yield set a new recovery high at 0.98% and closes in on resistance at 1.06% (2015 top). Interestingly, during the second half of last week the German 10y real yield added 15 bps (approaching -2% again) while inflation expectations declined by 5 bps (steadying just above 3%). Speeches by ECB governors continue to serve as wildcards for trading this week. EUR/USD failed to profit from these developments as US markets repositioned in a hawkish fashion as well –  contrary to the EU with the blessing of Fed Chair Powell. The fierce bond sell-off spilled into correcting stock markets (-2.5% in Europe and the US) and handed the greenback the benefit of the haven asset. The trade-weighted dollar finally set a new recovery top above 101. EUR/USD slid back below the 1.08-handle. Sterling was Friday’s underperformer amongst G4 FX with risk aversion and dismal UK eco data hurting GBP. EUR/GBP gained a big figure from 0.8316 to 0.8411.
•          Risk aversion remains name of the game this morning as China’s worsening Covid-situation takes the shine off French President Macron’s presidential re-election. China now locked down some areas of Beijing sparking additional growth worries. The Chinese yuan extends a catastrophic run which started after last week’s disappointing Q1 growth data. USD/CNY surged from 6.37 to 6.55 since. It’s the weakest level for the yuan in almost a year. The 2021 USD/CNY high stands at 6.58. The dollar remains in pole position in general in Asian dealings. Core bonds correct higher. Commodity prices cede around 2% with iron ore (-8.5%) underperforming. Today’s eco calendar is uninspiring with German Ifo business sentiment and Belgian business confidence the highlights. The Belgian debt agency aims to raise €2.8-3.8bn via its regular monthly OLO auction. OLO’s 81 (0.8% Jun2027), 94 (0.35% Jun2032) and 95 (1.4% Jun2053) are on offer. The Q4 earnings season gets in full swing after a weak start. Other highlights include US consumer confidence (tomorrow), Q1 GDP data (Thursday), PCE deflators and EMU April CPI numbers (Friday).

News Headlines

•          Parliamentary elections in Slovenia turned out in a surprisingly strong victory for newcomer Robert Golob and his Freedom Movement. Winning about 34% of the votes, he defeated the Democratic Party of nationalist Janez Jansa (24%). Jansa became prime minister for a third time in 2020 but his tenure was tainted by two years of weekly protests. His position after Sunday’s elections now hangs in the balance. Golob is expected to form a government with one or both of the smaller parties, the Social Democrats and the Left.
•          Germany will borrow an additional €40bn this year to soften the blow coming from the war and soaring energy prices on companies and consumers. Total new debt for 2022 will thus amount to almost €140bn. But taking into account the off-budget fund worth €100bn to finance military spending in the next few years, overall new borrowing will most likely exceed that €140bn. Borrowing in 2023, when the debt brake is scheduled to be in place again, should tank to less than €10bn. The Bundesbank last week proposed to raise annual borrowing limits under those debt brake rules saying it would “continue to ensure solid state finances and the requirements would be consistent with European fiscal rules”.


European yields recovered from the early stages of the Russian-Ukrainian war as the expected growth slowdown didn’t deter the ECB from formally stepping up the normalization plans. Net asset purchases will end in June, with a first rate hike likely in July. Runaway inflation expectations suggest the ECB’s response will still be too little, too late. Next resistance stands at 1.06% (2015 top)-

The Fed started its tightening cycle and published an aggressive blueprint for the remainder of the year. 50 bps rate hikes at the next meetings can be taken for granted. The US yield curve extended its bear flattening trend. Quantitative tightening will start soon (>=$95bn/month). The psychologic 3% resistance holds for now.

EUR/USD remains stuck in a downward trend channel. Losing the previous YTD low at 1.0806 implies a technical return to the 2020 bottom at 1.0636. ECB needs to step up its inflation response to give the single currency much needed backing. Russian war in Ukraine plays in the euro’s disadvantage as well.

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 doubt starting to filter through in markets. EUR/GBP bounced off the 0.82/0.83 support zone. The YTD high at 0.8512 is first meaningful resistance.

Calendar & Table

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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).
These market recommendations are the result of qualitative analysis, incorporating room for past experiences and personal assessments. The views are based on current market circumstances and can change any moment. The most prominent input comes from publicly available data, financial news, economic and monetary policies and commonly used technical analysis.
The KBC Economics – Markets desk has used reasonable efforts to obtain this information from sources which it believes to be reliable but the contents of this document have been prepared without any substantive analysis being undertaken into these sources.
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