Monday, 25 July 2022
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•          It has been one end of the week for markets. A number of event risks were all coming together on Thursday and Friday. First on the agenda was gas. Unlike what many had expected, Russia reopened the Nord Stream 1 pipeline, be it still at reduced capacity of 40%. Next Italy. Draghi eventually resigned as PM after losing the support of the right-wing parties. New elections are due September 25. Following the Italian drama was the ECB. The central bank started normalizing policy by a 50 bps inaugural hike. Sources earlier in the week leaked that such a larger sized move was a serious possibility. Importantly: the ECB announced more tightening is underway but ditched all forward guidance regarding the size of future hikes. Having frontloaded the exit out of negative territory, the Governing Council is transitioning to a meeting-by-meeting approach, with (inflation) data as guidance. This leaves all options open for the next meetings. The ECB also announced the new Transmission Protection Instrument under which it can buy bonds of specific countries to support an effective transmission of monetary policy if (some general) conditions are fulfilled. The amount is “not restricted ex ante”. Euro area (money) markets drew no firm conclusions after the July meeting on Thursday going into the PMIs on Friday. There was an outsized risk that the widely watched confidence indicators would drop in contraction territory and they did. Manufacturing fell to 49.6 while the services sector virtually stalled (50.6). The composite figure (49.4) suggests the economy is contracting at a 0.1% quarterly rate. Markit said that “a steep loss of new orders, falling backlogs of work and gloomier business expectations all point to the rate of decline gathering further momentum as the summer progresses.” German bond yields fell of a cliff in a range between 22.3 bps (2y) to 11.8 bps (30y). Markets currently don’t expect that ECB tightening will last in 2023 after rates hit around 1.5% end this year. The 10y yield (-19.2 bps) lost support at 1.12% and is testing the next at 1.035%. Italian spreads rose sharply, nearing levels seen in mid-June before the ECB emergency meeting. Yields in the US tumbled, with the move, unlike in Europe, already starting on Thursday after a batch of weak data (Philly Fed, jobless claims). Markets didn’t digest US PMIs on Friday well either. The important services sector unexpectedly felling below 50 (to 47.0). Yields over the two days fell between 18 bps at the long end and more than 30 bps in shorter tenors. We’re closely watching the 10y, which is now at the lower bound of the sideways trading range around 2.72%. The hefty action on bond markets were in stark contrast with currency markets. EUR/USD held a tight trading range around the 1.02 big figure. The trade-weighted DXY held north of 106. European stocks were remarkably resilient, ending Friday flat. In the US, tech stocks keep underperforming. The Nasdaq closed 1.9% lower.

•          Data is limited to the German Ifo indicator so that allows markets to settle after some hectic days. They don’t have much time to contemplate though with a slew of GDP and inflation data due in both Europe and the US. The Fed is having its policy meeting on Wednesday where it is expected to hike by another 75 bps. With growth clearly at the front of investors’ minds, it’s unsure whether this will suffice to put a bottom below core bonds. The technical picture in Europe already turned for the worse while it’s hanging on a thread in the US.

News Headlines

•          Rating agency Fitch on Friday confirmed Hungary’s long term foreign currency Issuer default rating at ‘BBB’. It also kept a stable outlook. According to the agency, Hungary’s ratings ‘are supported by strong structural indicators relative to other BBB peers and by its record of strong growth fueled by investments’. ‘These are balanced against high public debt, a record of unorthodox fiscal-and-monetary policy moves’. The stable outlook reflects the agency’s expectations of sustained growth, gradual improvement in external balances and fiscal consolidation resulting in an improvement of the public debt ratio in the next 3 years. Fitch also expects Hungary to reach an agreement with the EC over its national recovery plan by the end of September that will allow it to secure Next generation EU funding. Fitch expects growth at 5.1% this year, even as activity is expected to slow down in H2. 2023 growth is seen at 2.4%. Inflation is expected to average 11.3% this year and 7.6% next year. The budget deficit is seen at 4.9% this year and 3.9% next year.


The ECB ended net asset purchases and lifted rates with a 50 bps inaugural hike. More tightening is underway but the ECB refrained from guiding markets on the size of future rate hikes. Economic indicators however show growth is stalling or even contracting. Markets doubt whether tightening may last in 2023. Germany’s 10-yr yield extended a correction lower. Important support at 1.12% fell with the next at 1.03% under test.

The Fed started an aggressive tightening cycle. Another (June) inflation surprise raised the odds for a 100 bps hike in July instead of the flagged 75 bps one. QT will hit max speed by September. But markets discounted a good deal already and focus is again on growth after a batch of weak data. The lower bound of the sideways trading range in the 2.72% area is again under pressure.

The euro zone’s (energy) crisis is being accompanied by an unfolding Italian political crisis. Growing recession fears hammered EUR/USD below the 2017 low of 1.0341. Parity was tested before a technical correction higher kicked in. At 1.02, EUR/USD is still not out of the woods. It takes a return above 1.035 to call off the immediate downside alert.

The BoE in June signaled it might step up tightening. Initially this didn’t help sterling. However, a combination of euro weakness, PM Johnson leaving, the sharp correction in the oil price and the BoE reiterating its anti-inflation commitment, finally triggered a sterling short squeeze, pushing EUR/GBP below the established uptrend.

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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