Wednesday, 25 May 2022
Please  click here  to read the PDF version

Dear reader
There will be no KBC Economics-Markets reports on Thursday, May 26 and Friday, May 27. We resume our publications on Monday, May 30.



•          Of late markets were mainly driven by global sentiment and by investors pondering the impact of central banks tightening to cap inflation. In this complex, markets are giving ever more weight to activity data. Yesterday’s EMU PMI’s didn’t cause a big reaction. The EMU composite PMI slowed more than expected from 55.8 to 54.9. Still both the manufacturing (54.4) and services index (56.3) stayed at comforting levels, even as the outlook deteriorates. Except for some further euro gains, the direct market impact was modest. It was US data that further deteriorated an already fragile investor sentiment. The US composite PMI dropped from 56.0 to 53.8 mainly due to a decline in the services measure (53.5). Minutes later, the Richmond manufacturing index nosedived (-9 from 14). Markets rarely react much to housing data. However, the decline in April US new homes sales was too big to ignore (-16.6% M/M), extending a 10.5% setback in March. US equities touched intraday lows after the data, but recouped part of the losses later closing between +0.15% (Dow) and -2.35% (Nasdaq). Uncertainty on growth also caused a sharp bull flattening move with US yields declined between 14.2 bps (2-y) and 8.7 bps (30-y). The decline in EMU yields was more modest. ECB’s Lagarde and Villeroy confirmed a lift-off with gradual rate hikes starting in July/ September. However, hawks (Holzmann, Kazaks) kept the debate on a 50 bps hike open. German yields due to the risk-off lost between 5.2 bps (5-y) and 3.2 bps (30-y). On FX, a continuation of the USD correction was accompanied by a further euro comeback. DXY slid from 102+ to close at 101.85. USD/JPY fell below 127 (close 126.83). EUR/USD confirmed its break beyond 1.0642 to close at 1.0736. Sterling had to fight an uphill battle. A stronger euro, a sharp drop in the services PMI and ‘balanced’ comments from governor Bailey pushed EUR/GBP to the high 0.85 area (close 0.8565).

•          This morning, sentiment in Asia improves after yesterday’s WS selling. Regional equities mostly gain between 0.5% and 1.0%, the Nikkei underperforming (-0.1%). US yields and the dollar regain modest ground after yesterday’s setback (USD/JPY 127.0, DXY 101.95, EUR/USD 1.071). Later today, the US durable goods orders (exp 0.6%) and Minutes of the May 4 Fed meeting will be published. We don’t expect them to provide much new insights as the market focus is gradually turning to growth rather than inflation. Maybe also keep an eye at the US mortgage applications. There are again plenty of ECB speakers including Lagarde, Lane, Knot and Holzmann. Will the hawks continue to ‘challenge gradualism’? On interest rate markets, we look out whether the US 2-y yield can hold above 2.5%. For the 10-y, 2.72% is an important reference. If not, the dollar slide might also continue. For EUR/USD next reference is 1.0806, but that maybe is a bit too far short-term. For now the downside in EMU yields looks better protected compared to their US counterparts.

News Headlines

•          The Reserve Bank of New Zealand continued to frontload monetary tightening with a 50 bps hike bringing the OCR at the lower end of the estimated 2-3% neutral rate. The RBNZ aims to constrain demand which is supported by a strong labour market, continued fiscal support and strong terms of trade, until there is a better match with still-disrupted supply. While the RBNZ notes strong headwinds coming from heightened uncertainty and high inflation dampening global and domestic consumer confidence, it expects to tighten monetary conditions in a much more aggressive way than projected back in February. The RBNZ foresees an additional 200 bps hikes by the first half of 2023. Previously, the peak policy rate was seen in the second half of 2024 near  3.5%. Higher projected inflation of 6.9% this year (+0.3 ppts) and 4.4% in 2023 (+1.2 ppts) explain the twist. The kiwi dollar extends its recent rebound from the low 0.62 mid-May to 0.65 this morning. New Zealand ST swap rates soar more than 20 bps.

•          MNB vice governor Virag doubled down on his comments earlier this month, telling state news agency MTI that the central bank plans to slow base rate increases from the current 100 bps to about half that. He made the remarks even as he expects inflation to rise into double-digits in coming months. Virag also said the government should cut the budget deficit, which may help rein in inflation. Hungarian swap yields fell to the tune of 6 bps (+) in short tenors. The forint was able to contain the damage to EUR/HUF 382.82, though that’s still a very weak level historically.


The ECB will end net asset purchases in June. A first rate hike is likely in July. Speculation has caused real yields to bottom out. Inflation expectations, while still high, are correcting lower from record highs. The worrying growth outlook complicates the picture and triggered a first meaningful correction since the start of the Russian invasion. Support at 0.80% stood firm. The German 10-y yield returned close to the 1.0%.

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. Quantitative tightening will start in June and hit max speed from September onwards. But the recent yield surge this caused, has eased recently. Yields may be entering a period of consolidation. Important support is located at 2.72%.

EUR/USD lost the previous YTD low at 1.0806 and the 2020 bottom at 1.0636, worsening the technical picture. At first, the ECB flagging the rate lift-off in July didn’t help much. However, the 1.0341 2017 low survived. The pair regaining 1.0642 in a sustainable way could be a first sign of easing downside momentum.

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 temporary above the 0.8512 level. A sustained break would be a bad omen 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).
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.
It has not been assessed as to whether or not these insights would be suitable for any particular investor.
Opinions expressed are our current opinions as of the date appearing on this material only and can be opposite to previous recommendations due to changed market conditions.
The authors of this recommendation do not warrant the accuracy, completeness or value (commercial or otherwise) of any recommendation. Neither are the authors liable to those who receive these recommendations for the content of it or for any loss or damage arising (whether in tort (including negligence), breach of contract, breach of statutory duty or otherwise) from any actions or omissions of the authors in reliance on any recommendation, or for any claim whatsoever in respect of the content of, or information contained in, any recommendation. Any opinions expressed herein reflect the judgement at the time the investment recommendation was prepared and are subject to change without notice.
Given the nature of this advice (linked to currencies and interest rates) , the advice is overall not specific in nature.   As such there is no reference to any corporate finance contract and as such there is no 12 month overview based on the different advices.
This document is only valid during a very  limited period of time, due to rapidly changing market conditions.

Register for a 2 week free trial today, pass a Growth, Venture or Rocket Tryout and get a funded prop trading account for upto $120,000.