Wednesday, 29 June 2022
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•          European bonds continued to underperform their US peers yesterday. ECB Lagarde sharpened the central bank’s communication at the Sintra symposium. If necessary, the ECB would act in a determined and sustained manner to tackle inflation. Conditions under which gradualism would not be appropriate include a de-anchoring of inflation expectations or a more permanent loss of economic potential that limits resource availability (eg cut-off of Russian energy supplies). The German yield curve bear steepened slightly with yields rising by 6.1 bps (2-yr) to 8.3 bps (20-yr). Weak US eco data at the start of US trading triggered a turnaround in risk sentiment and supported US Treasuries. US stock markets eventually ceded 1.5% (Dow) to 3% (Nasdaq). The US yield curve bull flattened with yields ending the day up to 3.7 bps (20-yr) lower. June US consumer confidence and Richmond Fed Manufacturing Index started the rot in equities. Consumer confidence fell from a downwardly revised 103.2 to 98.7, the lowest level since February 2021. Details showed especially the expectations component responsible for the setback, both with regard to business conditions as with inflation developments. The Richmond Fed stands at its lowest since May 2020 with shipments (new orders and order backlogs) and employment taking a big hit while price pressure remains elevated. Forward looking indicators don’t make the most happy reading neither. The US Treasury concluded its end-of-month refinancing operation with a $40bn 7-yr Note deal. While it fared better than Monday’s 2-yr and 5-yr deals, metrics still couldn’t convince. The auction tailed with a setback in the bid cover. EUR/USD again failed to recapture the 1.06 handle despite the relative interest rate support with the dollar even clawing back. The pair eventually fell back to the low 1.05 area, both because of some upside fatigue as because of the U-turn in risk sentiment. EUR/GBP went nowhere around 0.8630.
•          European yields and the euro took a hit this morning following the earliest German regional CPI reading for June. North Rhine Westphalia CPI printed at -0.1% M/M and 7.5% Y/Y which is softer than the expectations for the national gauge (0.4% M/M and 7.9% Y/Y). Apart from German numbers, also Spanish and Belgian CPI are due today. If they effectively fend off the worst case scenario of a CPI acceleration tomorrow, it adds to our Summer consolidation/correction phase on bond markets. It also implies that EUR/USD could be restricted to 1.0350/1.0642 rather than 1.0350/1.08. Especially in the sell-on-upticks risk environment. Other factors to watch today are June EC economic confidence numbers and a panel discussion with ECB president Lagarde, Fed Chair Powell, BoE governor Bailey and BIS chief Carstens. More technical factors, like end-of-month and end-of-quarter extension buying could have an influence as well.

News Headlines

•          The Hungarian central bank (MNB) yesterday delivered a monster-hike of 185 bps to bring the base rate from 5.9% to 7.75%. It’s a sharp U-turn compared to just one meeting ago, when it slowed the tightening pace to 50 bps as it entered a period more gradual tightening. The MNB announced that with the move it intends to close the gap with the one-week deposit rate, which will be increased on Thursday from 7.25% currently. Doing so makes policy more transparent and sends a clear signal to markets who got increasingly worried that the MNB lifted the foot off the brake too soon. Inflation continued to rise into the double digits in May, is expected to increase further and won’t be in line with the target before 2024. The Hungarian forint went in a tailspin in recent months (EUR/HUF north of 400), amplifying inflation dynamics. It strengthened to EUR/HUF 397.15 in the wake of the decision. The MNB said the tightening cycle will continue until the outlook for inflation stabilizes around the central bank target in a sustainable manner and risks become evenly balanced.


The ECB finally turned the corner in its inflation narrative. The central bank ends net asset purchases this month, facilitating rate hikes from July. Real yields took over from inflation expectations, pushing the German 10-yr yield to its highest level since early 2014. The move ran into resistance at 1.9% (50% retracement on long term decline) before correcting lower. The uptrend remains firmly intact.

The Fed started tightening and published an aggressive blueprint for the remainder of the year. A second 75 bps rate hike in July is likely. Quantitative tightening will hit max speed by September. Anticipation on even faster Fed tightening pushed the 10-y yield to a new multi-year high of 3.5%. Short-term correction is in store with 2.72% marking a firm bottom.

EUR/USD tested the 2017 low at 1.0341 which survived. The pair (temporarily) rebounded mainly as the broader dollar rally took a pause. However, the 1.0806 resistance still proved one step too far, even as the ECB formally announced to start hiking rates as inflation stays unacceptably high. Range-trading ahead.

The developing cost-of-living crisis seems to hit the UK economy first and the hardest. Weak economic data toughen the Bank of England’s dilemma in battling inflation with doubts filtering through in markets. The BoE in June signaled it might step up tightening, but it is unsure whether this will change fortunes for sterling. EUR/GBP 0.8721 is next resistance

Calendar & Graph

Note: All times and dates are CET. More reports are available at 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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