Friday, 28 October 2022
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•          The ECB hiked its policy rates by another 75 bps yesterday, bringing the total effort to 200 bps since the inaugural rate hike in July. The ECB deposit rate now stands at 1.5%. Rumours this morning suggest that three governors dissented in favour of a 50 bps move. The wording of the new policy statement in any case pointed to some disagreement on how to proceed from now on. It ditched a reference to continue hiking at several more meetings, though ECB Lagarde mentioned it at the Q&A session afterwards. Instead of focusing on frontloading, the opening paragraph now stressed the substantial progress made in withdrawing monetary policy accommodation. Both changes suggest no consensus on continuing the current 75 bps rate hike pace in December. At least not for the moment. EMU money markets discount a slowdown to 50 bps, bringing the policy rate at 2%. The jury is still out, but we prefer to err on the hawkish side of this consensus. Today’s first national October inflation readings (Germany, Spain, France, Italy, Belgium) could already serve as a wake-upcall. Especially should mild winter weather postpone the day of economic reckoning for the euro zone. The ECB will use its final policy meeting of this year to set out the blueprint for winding down its €3.2tn APP bond portfolio, a second pillar in the normalization process. Finally, they recalibrated TLTRO III terms from November 23 onwards (indexed to average applicable key ECB interest rates from that starting point). The correction higher on (European) bond markets accelerated following the “dovish hike” by the ECB. The German yield curve bull steepened with yields losing 9.7 bps (30-yr) to 17.8 bps (5-yr). 10-yr yield spreads vs Germany narrowed by up to 5 bps with Greece (-9 bps) and Italy (-17 bps) outperforming. The euro suffered from the significant loss of interest rate support, returning below parity. EUR/USD closed at 0.9964 from an open at 1.0081. EUR/GBP in the same vein slid from 0.8669 to 0.8616.
•          Today’s eco calendar centers around above-mentioned national inflation readings. First regional German figures showed a significantly higher M/M-pace, suggesting clear upside risks. German Bund futures immediately lost some of yesterday’s gains. We nevertheless think it’s too soon to call the bond correction already over with next week’s FOMC meeting potentially also delivering a dovish hike. Speeches by ECB members are wildcards. Overall risk sentiment turns more fragile again following disappointing Q3 earnings and weak outlooks.

News Headlines

•          The odd one out. The Bank of Japan sticks to its super easy monetary policy by keeping the main rate at a negative -0.10% and targeting a 10-y yield of 0% (with +/-25 bps deviations allowed). This is despite having lifted inflation forecasts for the FY ending in March from 2.3% to 2.9%. Inflation in the two years thereafter is seen back below 2% though, at 1.6%, a sign the BoJ views the current inflation (3% headline in September) as not durable. The central bank also grew more cautious on growth, revising it lower from 2.4% to 2% for the current year and from 2% to 1.9% for the next. The Japanese government yesterday announced a new economic package worth $200bn in support of the BoJ’s inflation quest. The extreme policy divergence with the likes of the US has inflicted serious damage to the JPY. USD/JPY recently breached the 150 barrier before the MoF stepped in again with yet-unconfirmed interventions. The pair currently trades unfazed around 146.25.

•          British PM Sunak and Chancellor Hunt are weighing tax increases and spending cuts totaling £50bn per year to fill a massive black hole in public finances, the FT reported citing people close to Hunt. The eyepopping number, to the tune of 2% of GDP, is based on Treasury calculations of an initial fiscal gap between £30 and £40bn. Filling this will require an effort of about £45bn because measures taken will also affect growth and thus government revenues. But Sunak and Hunt want to create some additional headroom to allow for the possibility that the economy performs worse than expected.


The ECB ended net asset purchases and lifted rates by a combined 200 bps since the July meeting. 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%) before a correction kicked in. Losing the neckline of the double top formation at 2.14% calls for a return towards the 1.82%/1.77%/1.74% support zone

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 trying to leave the strong downward trend channel since February. USD for the largest part of this year profited from rising US (real) yields in a persistent risk-off context. Geopolitical and European recessionary risks kept EUR in the defensive even as the ECB finally embraced on a tightening cycle. The current correction on bond markets weighs on USD. KEY resistance stands at 1.0350.

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

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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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