Tuesday, 25 October 2022
Please  click here  to read the PDF version


•          UK Gilts hugely outperformed German Bunds and US Treasuries as it became clear that Rishi Sunak would become the next Prime Minister. The main move occurred at the start of trading after ex-PM Johnson dropped out of the race over the weekend before even getting in. UK yields fell around 30 bps across the curve. Sunak is rumoured to stick to the previous government’s October 31 deadline to present the long term fiscal outlook, allowing the Bank of England to take this into account when setting policy on November 3rd. Today’s speech by Bank of England chief economist could perhaps already give some insight in the central bank’s thinking. UK money markets currently discount consecutive 75 bps rate hikes at the November, December and February policy meetings. Sterling’s “relief rally” rapidly fainted with EUR/GBP closing at 0.8754.
•          US Treasuries ended 1.3 bps (3-yr) to 4.2 bps (30-yr) higher. We stick to our view that Treasuries’ are up for a correction higher on market talk (WSJ, Fed Daly) about the Fed slowing down it’s tightening pace from December onwards. Yesterday’s US PMI’s added a bit to this feeling with the composite dropping from 49.5 to 47.6 (vs 49.2 expected). On a sectoral level, the manufacturing PMI now fell below the 50 boom/bust mark (first time since June 2020) with the services PMI sinking deeper (46.6 from 49.3 vs 49.5 expected). The downward lurch in services activity was fuelled by the rising cost of living and tightening financial conditions. October saw a steep drop in demand for manufactured goods, meaning current output is only being maintained by firms eating into backlogs of previously placed orders. Chief business economist at S&P Global Market Intelligence Williamson, responsible for the surveys, says that there is an increased risk of economic contraction in Q4 while at the same time inflationary pressures remain stubbornly high. However, there are clearly signs that weakening demand is helping to moderate the overall rate of inflation, which should continue to fall in the coming months, especially if interest rates continue to rise.
•          The disappointing US PMI’s followed on the heels of weak numbers in EMU and the UK earlier on the day. They didn’t left instant traces on markets though. The German yield curve bull flattened with yields ending 3.8 bps (2-yr) to 10.4 bps (30-yr) lower. The same doji-like patterns that appeared on US charts on Friday, are now there for Germany as well. With Thursday’s ECB meeting approaching soon, the case for a short term correction is less strong than in the US though. EUR/USD closed a tad higher at 0.9874. Stocks gained up to 2% in Europe and 1.5% in the US. Bad economic news is good news… Today’s eco calendar probably won’t impact trading with German Ifo Business Climate, US consumer confidence and Richmond Fed Manufacturing.

News Headlines

•          Polish president Duda signed the extension of the anti-inflation shield to end 2022 into law yesterday. The measures include a reduced 8% VAT on fuels, an exemption for select fuels from a retail sales tax, keep a 0% VAT on fertilizers and food that was previously subject to a 5% VAT rate and hold excise taxes on electricity, some fuels and light heating oil at the minimum EU level. The decision was widely expected. Some policy members of the National Bank of Poland have already said it will be critical what will happen with the shield next year as it currently curbs some of the inflationary pressures. Inflation stood at 17.2% y/y in September – already the highest since 1996. Core measures came in at 10.7% y/y.
•          China’s central bank raised the so-called macro-prudential parameter for companies and bank’s cross-border financing from 1 to 1.25. Doing so allows them to borrow more from overseas and may enable more foreign capital to flow in. It is doing so at a time the (onshore) Chinese yuan tumbled to the lowest level since 2008 against the USD. The announcement also came shortly before the PBOC set the daily reference rate for the yuan at the weakest level since 2008. USD/CNY gaps higher at the Asian open, to 7.30.


The ECB ended net asset purchases and lifted rates by a combined 125 bps at the July and September meetings. 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%) with real rates driving the push higher. First support in case of corrections stands at 2.14%

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 4.5% early next year and remain above a neutral 2.5% over the policy horizon. QT hits max speed. The 10y reached its highest level since 2007. Doji on the charts suggests room for short term correction with some Fed members calling to slow the tightening cycle.

EUR/USD is in a strong downward trend channel since February. The dollar remains the main beneficiary of rising US (real) yields in a persistent risk-off context. Geopolitical and recessionary risks are bigger for Europe, holding down the single currency as well even as the ECB finally embraced on a tightening cycle. Resistance stands at EUR/USD 0.9950/1.0050.

The UK government had to backtrack on its lavish fiscal spending plans which sent sterling initially tumbling towards the EUR/GBP 0.90+ area. Yawning twin deficits and rising risk premia will continue to weigh on the UK currency longer term even as markets think that the BoE will have to step up its tightening cycle.

Calendar & Table

Note: All times and dates are CET. More reports are available at KBCEconomics.be 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.

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.