Tuesday, 28 March 2023
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•          Yesterday, financial stress that dominated investor positioning going into the weekend, gradually subsided. Markets apparently err to the view that issues at some US regional banks still should be considered as idiosyncratic and that authorities have enough tools to prevent those individual cases to affect the global system in profound way. Such a scenario allows central bankers to continue to give inflation the focus it needs in their policy mix. Eco data were few, with the German Ifo business confidence the exception to the rule. The headline index improved more than expected (93.3 from 91.1) supported by better than expected readings for both the current assessment and expectations. The direct impact on trading was modest. Even so, it confirmed the message from the PMI’s that the European/German recovery remains on track. In a brother risk-on repositioning, US yields rebounded between 22.9 bps (2-y) and 11.7 bps (10-y). Despite intra-day cheapening, the $42 bln 2-y Treasury auction only received mediocre investor interest. The rise in yields was mainly driven by higher real yields (10-y +11 bps). Markets now again see about a 50/50 chance for one additional Fed rate hike in May and have reduced Fed rate cut expectations by about 25 bps for early next year. German yields showed a similar move, albeit more modest, with yields rising between 12.8 bps (2-y) and 9 bps (30-y). The Euro Stoxx 50 closed 0.82% higher. In the US the Dow gained 0.60% but the Nasdaq ceded 0.47%. Higher real yields apparently complicate the rebound of growth stocks. The dollar also didn’t profit from higher real yields as broader risk sentiment also dominated FX trading. DXY dropped back below the 103 handle. In a protracted intraday uptrend EUR/USD closed near 1.08. The yen underperformed with USD/JPY closing at 131.57. Sterling also held up well, with EUR/GBP still attacking 0.88 big figure (close 0.8788).

•          This morning, Asian equity markets mostly show modest gains. US yields ease about 1-2 bps. The dollar remains in the defensive, even against the yen (DXY 102.65, USD/JPY 130.7). Later today, the eco calendar contains country confidence data in Europe and consumer confidence (Conf. Board) in the US. A modest decline from 102.9 to 101 is expected. We don’t expect a profound impact on trading. Markets might be slightly more sensitive to a negative than a positive surprise. ECB’s Muller and Vasle are scheduled to speak. In a day-to-day perspective, we expect yesterday’s trends to continue, albeit at a much more modest pace. The US 2-y yield is nearing the 4.0% handle. EUR/USD managed to hold above the 1.0735 support area, suggesting some further gains within the 1.0760/1.0913 short term barriers. Sterling also remains well bid this morning (EUR/GBP 0.878). Overnight, UK BRC shop prices were reported at 8.9%, a record since the start of the series in 2005.


•          Hungary ratified Finland’s Nato membership yesterday. The country together with Turkey have long opposed Finland’s bid (and still do in case of Sweden), with some calling it a game of blackmail over the EU blocking funds. But after Turkey dropped resistance about two weeks ago, Hungary followed soon thereafter. PM Orban’s U-turn is seen as a latest sign of pivoting to the west, away from Russia. Economic benefits of that relationship are fading with many companies contemplating an exit out of the country.

•          The European Commission delayed the payout of €19bn pandemic recovery funds to Italy by at least one month. There is skepticism about Italy reaching preset targets that are required to unlock the aid. The Commission will double-check in particular progress on the licensing of port activities, on district heating and on two urban renewal projects. Of the €192bn Italy is to receive, some €67bn has already been distributed. But red tape is slowing down authorization processes, leaving Italy struggling to allocate and spend the money as quickly as originally planned.

•          New research by the World Bank showed that the global economy risks suffering a lost decade of growth. The pandemic and the Russian invasion were said to create lasting damage to economic performance and reduce growth rates for the rest of this decade by a third, from 2.6% between 2011 and 2021 to 2.2%. In the first 10 years of this century, growth was 3.5%. The World Bank cited huge uncertainties and reduced investments (about half compared to the previous two decades). The slowdown in global prospects could be much sharper in case another financial crisis would cause a global recession, it added referring to the turmoil in financial markets over the past weeks.

News Headlines

The ECB stuck to its plan to hike the deposit rate by 50 bps in March despite recent turmoil around some regional US banks and Credit Suisse. It provided no specific guidance for the May meeting, but clearly stated that more ground has to be covered if inflation develops as forecast (>2% over policy horizon and recent uncertainty wanes). Such scenario should put a floor below yields despite the huge amount of volatility. The 1.92% serves as a first/strong support.

The Fed delivered a 25 bps dovish hike in March. Uncertainty around the fall-out from the regional bank implosion clouds the outlook. The new dot plot suggests one more final move this year. It does not show rate cuts pencilled in for 2023 but markets beg to differ. Short-term US yields tanked. Longer tenors, including the 10-yr, suffer from recessionary fears. Support at 3.5% has been broken, with 3.20% a next potential reference in case of persistent uncertainty.

The euro profited from the ECB’s unabated hawkish stance and subsiding energy concerns. The nearing end of the Fed cycle combined with local financial stability concerns meanwhile weighted on the dollar. EUR/USD surpassed the 1.0735 resistance and tries to hold above this level even as uncertainty on financial stability also affected European markets. Some consolidation might be on the cards for EUR/USD.

The usually risk-sensitive pound proved surprisingly resilient recently. This may not last. The BoE raised rates by 25 bps. A next move higher is still conditional but in any case priced in already. As with the Fed, markets instead start anticipating the BoE cutting cycle. This contrasts with ongoing hawkish ECB rhetoric. It adds to the already weak structural GBP cards (weaker growth prospects, twin deficits, long term brexit consequences …).

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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