Tuesday July 26 2022
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•          Core bond yields yesterday sought to recover some of the heavy losses incurred on Thursday and Friday last week. With (small) success initially, especially in the US. European bond yields were helped by comments from ECB’s Kazaks and Visco respectively advocating and not ruling out another 50 bps rate hike in September. But then news hit markets that Russia is taking another turbine essential for gas flows to Europe offline for maintenance. This will cut supply from an already reduced 40% to just 20%. German yields swapped all gains to the tune of 5 bps for losses. The curve steepened by dropping 4.3 bps at the front and 0.6 bps at the very long end. US yields retained about half of earlier gains, adding between 3.8 and 5.1 bps across the curve even as two more regional manufacturing activity gauges either turned or became more negative. Gas prices surged 10%. Oil prices added almost 2% with tight physical supplies, particularly in Europe, outweighing recession fears. Stock markets dropped on the news but largely recovered later on. Europe finished with small gains of about 0.2%. Wall Street closed mixed with the Nasdaq underperforming (-0.43%). The euro and the dollar were both trading without clear direction. It kept EUR/USD balanced just north of 1.02. The Japanese yen slid half a percent against both. The British pound was among the better bid with EUR/GBP falling through 0.85 yesterday and continues to be one of the better performers in quiet Asian dealings this morning. The dollar is marginally on offer. Asian-Pacific stocks in many cases overcame opening weakness following retail bellwether Wallmart’s profit warning after US closing hours yesterday. Hong Kong outperforms. In other news on the autonomous region, the aggregate balance – a measure of interbank liquidity – halved in recent weeks. This is the result of the Hong Kong Monetary Authority heavily intervening in FX markets (buying HKD from commercial banks, selling USD) to protect the dollar peg. USD/HKD has been trading near the upper bound of the 7.75-7.85 range since May. At the current rate, liquidity may be depleted as soon as the end of next month. More major companies including McDonalds, 3M and Coca-Cola are publishing earnings today and economic data includes the Conference Board consumer confidence for July and some US housing data. Barring significant surprises, they probably won’t influence trading materially ahead of tomorrow’s Fed policy meeting. Core bonds traders are sidelined. With US money markets having fully discounted the flagged back-to-back 75 bps hike, we expect low-volume, directionless trading as investors look for clues what the Fed’s next move is going to be. There may be room for some further dollar consolidation but we see very few reasons for its resilience to be undermined any time soon, especially against the euro.

News Headlines

•          Economic growth in Korea unexpectedly accelerated in Q2 to 0.7% Q/Q from 0.6% in Q1. Activity was 2.9% higher compared to the same period last year. The strong performance was driven by a 3% rise in private consumption as consumer spending picked up more than expected after the lockdowns. Government spending (1.1%) and construction investment (0.6%) also added to growth. The strong domestic performance was partially offset by a 3.1.% decline in exports. Imports eased 0.8%. The data allows the Bank of Korea to continue its tightening cycle. Inflation printed at 6.0% in June. The BoK earlier this month raised its policy rate by 50 bps to 2.25%. The next BoK policy meeting is scheduled on August 25.

•          According to Czech TV, Finance Minister Zbynek Stanjura proposed to raise the 2022 budget deficit target to CZK 326.9 bn. The initial deficit was put at CZK 280 bn. Higher spending, amongst others, will be used to address the impact of the war in Ukraine and to facilitate further measures to ease the impact of higher energy prices. The budget deficit also widens due to higher pension costs. At the same time the deficit will be mitigated by higher tax revenues due to higher inflation. The Czech budget deficit hit a record high CZK 420 bn least year (5.9%). The finalization of the amended budget is expected to be debated by the cabinet on Wednesday. The Finance Minister recently indicated that he still intends to reduce the 2023 deficit to CZK 280 bn, the level that was initially planned for this 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 activity data. The 10y yield revisits the lower bound (2.72% area) of the sideways trading range.

The euro zone’s (energy) crisis is being accompanied by an Italian political crisis. Growing recession fears hammered EUR/USD below the 2017 low of 1.0341. Parity was tested before a technical (USD-driven) 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.

A combination of euro weakness, PM Johnson’s exit clearing some political fog, a correction in the oil price and the BoE reiterating, potentially stepping up its anti-inflation commitment, triggered a sterling short squeeze early July. EUR/GBP fell below the established uptrend before finding support around 0.84. A balance of weakness could keep the pair in a sideways 0.84/0.86 trading range.

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.

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