Tuesday, 27 September 2022
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•          We cannot but kick off with the UK again. Aggressive selling in UK bonds and the pound prompted a coordinated response by Treasury and the Bank of England. Markets were all but impressed. UK yields again soared 41.6 (10y) to 55.4 bps (2y). All segments of the curve are now well above 4%. Sterling got whacked in thin Asian dealings but recouped most of the losses afterwards. It even traded with daily gains amid speculation the BoE would come up with an inter-meeting hike. But it only reiterated its commitment to bring back inflation to 2% and said it would assess the (fiscal) situation at the November meeting. Money markets do bet on a super-duper-sized rate hike then to the tune of 150 bps. EUR/GBP eventually finished at 0.899, up from 0.893. Cable closed lower at 1.069. US yields were very eager to join the UK. The curve shifted north with changes between 13.4 (30y) and 23.9 bps (7y). Real yields (10y) added no less than 31 bps. Fed’s Mester put it very clear: “rates are not coming down next year”. German yields rose 3.3 bps to 9.1 bps with the long end underperforming. ECB president Lagarde before the EU Parliament said the central bank will consider quantitative tightening once rates have hit the neutral level. Assuming this is somewhere around 2%, we’ll get there already by the end of the year so that QT in theory could start in Q1 2023. The dollar remained the indisputable number one on FX markets. The trade-weighted DXY closed above 114, a new two-decade high. EUR/USD tumbled to just north of 0.96.

•          That “ever-stronger” dollar is however taking a well-deserved breather in Asian dealings this morning though. Sterling rebounds from the two-day beating and shares the top place on the G10 scoreboard with the kiwi dollar, even as RBNZ governor Orr said the tightening cycle is getting very mature (see below). The dollar retreat provides some relief for stocks. Wall Street yesterday fell another 1% and the EuroStoxx50 set a new YtD low with support from the downward sloping trendline connecting March-July troughs kicking in. But futures this morning suggest a green opening. Asian equities trade mixed. Core bonds lick their wounds, resulting in a 5 bps decline in US Treasury yields.

•          Today’s economic calendar contains US data only, ranging from durable goods orders over housing data to consumer confidence (Conference Board). We think they’ll play second fiddle in the run-up to other interesting data including European HICP (Thursday and Friday). The latest aggressive repositioning in core bonds, FX markets (dollar especially) and equities may ease somewhat in a daily perspective. The avalanche of central bank speakers serve once again as a wildcard. Worth mentioning is today’s Hungarian central bank policy decision that comes with updated forecasts. Another rate hike is expected (100 bps to 12.75%). Vice-governor Virag last week said the MNB will assess from today’s meeting on whether hikes should be stopped.

News Headlines

•          New Zealand Central Bank governor Adrian Orr admitted that the RBNZ still has some work to do to bring inflation back under control but that the tightening cycle is already very mature as the bank has already done much. The Reserve Bank has “a little bit more to do before we can drop to our normal happy place, which is to watch, worry and wait for signs of inflation up or down,” he was quoted. The RBNZ governor felt comfortable on employment, but said real wages are still being challenged by inflation, which the central bank has to bring down. He attributed the decline of the kiwi dollar due to the broader increase of the USD. The RBNZ raised its policy rate to 3.00% as inflation stands at 7.3%. NZD/USD yesterday touched 0.5625 coming close to the March 2020 corona low just below 0.55.

•          The 2023 budget draft as approved by Czech government yesterday sees a budget deficit of CZK 295 bln compared to earlier plans for CZK 270 bln target. Amongst others, the Czech government raised spending to mitigate the impact of higher energy prices by imposing caps on energy prices. The government also proposes an increase in defense spending and investments in infrastructure. For this year the government has a budget target of CZK 330 bln. The draft budget now has to be approved by Parliament.


The ECB ended net asset purchases and lifted rates with a 50 bps inaugural hike and a 75 bps follow-up move. A similar-sized move in October is in the cards. Germany’s 10-yr yield broke out of the corrective downward trend channel since mid-June and took out the YTD high at 1.93%. In case of a sustained break, 2.56% serves as the next reference.

After three 75 bps rate hikes, the Fed moves into (modestly) restrictive territory, but more rate hikes are needed to slow aggregated demand. After a sharp correction this summer, the 10y breaks beyond the 3.50% barrier. With the Fed signalling a prolonged period of restrictive policy, next target at 3.76% is reached and 4.0% is on the radar.

EUR/USD is in a strong downward trend channel since February. A hawkish ECB did no more than buying the euro some time. The dollar remains the main beneficiary of rising US (real) yields combined with a persistent risk-off context. Geopolitical tensions and the risk of a recession don’t help the euro either. The break below 0.9864 opened the way 0.96 support area (2001 interim high).

The Bank of England hiked by 50 bps in September but risks falling behind the curve with lavish fiscal support. Markets aggressively repositioned in response. The pound is unable to profit from this increased rate support though with attention going to yawning deficits and rising risk premia. EUR/GBP skyrocketed above 0.90. Sterling’s faith is sealed.

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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