Wednesday, 28 September 2022
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•          The core bond relief couldn’t even last for a full day. The most eyepopping move occurred in UK markets, where the 2y yield at some point fell almost 40 bps but eventually closed 7.7 bps higher. The long end surged another 45 bps. Short term yields in the US were still down 4.1-6.1 bps but faced losses that were more than double earlier in the day. Europe’s swap curve steepened with gains of 2.4 bps (2y) to 14 bps (10y; now comfortably above 3%). This impressive intraday yield turnaround occurred organically, starting around noon but was reinforced by reports about allegedly sabotaged leaks to the Nord Stream pipelines (pushing gas prices up by 25% at some point) and warnings that Russia may cut supplies via Ukraine – the last link that still delivers some to western Europe. Fed’s Bullard stressing the pressing need for more decisive rate action in order to restore credibility added oil to the fire. Stocks gave up initial gains to finish 0.4% lower in Europe. In the US only the Nasdaq was able to close in the green (+0.25%). Dollar weakness also reversed during the day. The trade-weighted closed at 114.1. EUR/USD finished just south of 0.96. The yen continued to flirt with 145; the level that prompted FX interventions last week. Sterling recovered a tad of previous losses. EUR/GBP was down from 0.899 to 0.894. Cable rose to 1.073.
•          It’s business as usual in Asian dealings. King dollar roars again, helped by the White House downplaying prospects of an agreement à la Plaza 1985 to counter the strong greenback. That’s no surprise as this helps to dampen inflation. EUR/USD is testing the previous intraday YtD low/support at 0.955. DXY advances to 114.6. The yuan falls to the lowest level against the dollar since 2008 (7.22). “Business as usual” also includes higher core bond yields (US adds 2-3 bps across the curve) and declining equities (South Korea underperforms with losses of more than 3%).
•          It’s again speech fest on the economic calendar today. Central bankers from both sides of the Atlantic participate in the inaugural Frankfurt Forum on US-European Geonomics today. The (role of the) euro and the dollar are among the discussion topics. We don’t think it will affect the current market dynamics though. The US10y already tested the symbolically important 4% hurdle this morning and we look out for a break higher. After securing the 3% barrier, the 10y European swap rate is headed for the 2011 high at 3.67%. EUR/USD is back at the lower bound of the downward trend channel and lost support of the 2001 interim high (0.9594). We cannot exclude a break lower given the unabating dollar strength. Equity futures point to a lower opening to the tune of 0.7%.

News Headlines

•          The Irish government yesterday announced what it called two budgets in one. The government upwardly revised its forecast for 2022 modified domestic demand to 7.7%, but this is expected to slow sharply in 2023 (1.2%). For this year the government expects a budget surplus of €1 bln and the surplus is expected to rise further to €6.4 bln next year, due to higher revenues, including revenues from VAT, income tax and corporate tax. This surplus allowed the government to take measures to ease the cost of living crisis. A total of €11 bln spending is made available consisting of €4.1 bln one-off measures and €6.9bln permanent budget measures. The one-off measures include businesses receiving up to €10.000 p/m for energy bills while households will receive €600 electricity credits. The permanent measures include raising the threshold for the highest income tax rate from € 36 800 to 40.000, amongst others.

•          The IMF on Wednesday said that the new proposals of the UK government would likely increase inequality. An IMF spokesman in response to a query from Reuters was quoted: ‘Given elevated inflation pressures in many countries, including the UK, we do not recommend large and untargeted fiscal packages at this juncture, as it is important that fiscal policy does not work at cross purposes to monetary policy.’ The Fund suggested that the government in its November budget should consider ways to provide support that is more targeted and reevaluate tax measures for higher income earners.


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% was hit quickly thereafter, bringing 4.0% 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 to the psychologic 0.95 mark.

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

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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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