Thursday, 29 September 2022
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•          The Big Bail(ey)-Out. By announcing a temporary purchasing programme of long-dated UK Gilts, the Bank of England put an end to the unfolding bond crash. Originating from the Financial Policy Committee, it is a measure to safeguard financial stability that does not change the Bank of England’s monetary policy stance (in theory). The plan is to buy £5bn at each daily auction, running through October 14, thus totaling £65bn. The annual target of an £80bn Gilt stock reduction is unchanged. Gilt yields fell off a cliff with a record drop in the 30y yield of 105 bps. Other tenors fell between 35 bps (2y) to 50 bps (10y). The emergency action affected US and European bond markets as well. US yields tumbled 12-24 bps with the belly of the curve outperforming. The European swap curve steepened with changes ranging from -12 bps (2y) to +0.1 bps (30y). Risk sentiment materially improved following the BoE announcement. European stocks pared 2% losses to finish marginally in the green. WS went full steam ahead (+2%). The dollar fell. DXY closed at 112.6, down from an intraday high of 114.78. Cable rebounded to 1.089. EUR/USD bounced off the lower bound of the downward trend channel at 0.954 to end the day at 0.974. Several ECB governors, including president Lagarde, reiterated the need for more and decisive rate action.
•          Asian stocks grind higher this morning after yesterday’s sell-off. South Korea outperforms (+1.8%). The drop in core bond yields on Wednesday is partially reversed with American rates adding between 4.4 and 10 bps across the curve. Neither does the dollar extend the decline, on the contrary. EUR/USD gives up about half of yesterday’s gains. Sterling is again under pressure. USD/JPY fell back from the highest level since 2008 yesterday at 7.25 to 7.2 following a strong verbal intervention by the PBoC (see headline below). The pair gapped lower at the open (7.162) this morning but in the meantime made it back to yesterday’s closing level already. USD/JPY hovers just south of 145.
•          Developments on Wednesday may have ushered in a period of some sideways consolidation in the US dollar and bond markets. We see scope for 3.5-4% range trading in the US 10y yield. Short(er) tenors are probably better protected to the downside with central bank expectations firmly cemented. In Europe’s 10y swap yield we’re looking at 2.72% to the downside (June high) to offer support. Another avalanche of central bank speeches and German inflation numbers (expected at 10.2% y/y) ahead of the European figure due tomorrow serve as a wildcard though. An upward surprise will prompt (short-term) yields to test their recently formed highs.

News Headlines

•          The caretaker government of outgoing Italian Prime Minister Draghi substantially reduced next year’s growth forecasts. In a scenario of unchanged policy, next year’s growth was revised lower to 0.6% from 2.4% previously. The Italian Treasury slightly upwardly revised this year’s growth estimate to 3.2% from 3.1% due to a strong first half, but the government expects economic activity to slightly decline over the second half of the year. Despite a deterioration of the growth outlook, the government assumes high inflation to bring down the country’s debt to GDP ratio. Higher excise duties and VAT also are expected to improve the budget deficit. This year’s deficit is now estimated at 5.1% of GDP from 5.6% earlier. Next year’s deficit is also expected to improve to 3.4% of GDP (was 3.9%). The 2022 debt ratio is now seen at 145.4% (was 147), to improve further to 143.2% next year.

•          The People’s Bank of China (PBOC) yesterday issued some verbal warnings on a further depreciation of the yuan. In a statement, the PBOC warned that betting on a one-way depreciation of the yuan will definitely lead to losses in the long term. It also said that key market participants need to “voluntarily safeguard the stability of the market, and be firm when they need to iron out big rallies or declines in the exchange rate.” Yesterday’s statement this morning is followed by comments in the state-owned Security Times that yuan was unlikely to continue to depreciate rapidly. The yuan this morning temporarily rebounded back below USD/CNY 7.20, in what was the first gain in nine days even as this was at least partially due to a correction on recent broad USD rebound.


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 aggregate 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. 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 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).
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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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