Thursday, 30 June 2022
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•          Markets yesterday still showed highly sensitive to any headline on inflation. Even the CPI release from the German state of North-Rhine Westphalia triggered a nervous start on (European) bond markets. The lower than expected inflation print (-0.1% M/M) later was conformed in the overall German figure (HICP -0.1% M/M, 8.2% Y/Y in May, from 8.7% in April). The slowdown was at least partially due to a one-off reduction in the cost of public transport. Later, Spanish HICP (10% Y/Y) and Belgian (9.65 % Y/Y) CPI showed no sign of easing at all. European yields temporarily reversed the initial decline. However, markets one way or another still pondered the idea that inflation might be nearing a peak momentum. Financial inflation expectations both in EMU and the US eased further. At a panel debate, Fed’s Powell, ECB Lagarde and BoE governor Bailey all reiterated that preventing a de-anchoring of inflation expectations should be avoided at any price. Investors apparently conclude that the ‘inevitable’ slowdown in growth might allow CB’s to slow the pace of hiking in 2023. A further topping out in (some) commodities also gives some comfort. Whatever the driver, core bonds rebounded. The belly of the curve outperformed the wings. The US 2-y eased 7.1 bps. Yields in the 5/10-y sector declined 9/8 bps. Similar reaction in Bunds the 5y outperforming (-15 bps) despite mixed regional inflation data. The euro initially tried to resist the decline in EMU yields, but broader USD strength finally pushed EUR/USD off a cliff (close at 1.0442 VS open 1.052). DXY finished north of 105. The Hawkish Sintra Powell comments pushed USD/JPY for a multi-year high test of the 137-level. Sterling hardly gained against a soft euro (close EUR/GBP¨0.8616). The Swiss franc strengthened below parity against the euro (close EUR/CHF 0.997). US equities showed no clear directional trend (S&P -0.07%).

•          Risk sentiment in Asia stays fragile with China outperforming on better PMI’s (cf infra). The dollar eases (DXY 104.98; USD/JPY 136.4; EUR/USD 1.045). Later today, investors will keep a close eye at the US PCE deflators (May). A further substantial rise is expected (headline 0.7% M/M and 6.4% Y/Y). Or will markets give more weight to a potentially softer core reading (0.4% M/M expected)? The Chicago PMI, US jobless claims might give some further insights in the growth part of the equation. OPEC+ meets in Vienna, but no amendment of the approved production hike for August looks to be on the cards. The Riksbank is expected to hike rates by 50 bp today. On interest rate markets, recent consolidation pattern looks firmly in pace with the topside in yields capped for now as investors look out for the impact of (anticipated and already implemented) policy tightening and slower growth on inflation. 3.00% and 2.13% are first intermediate support of the US 10-y and the 10-y EMU swap respectively. In EUR/USD even the 1.0600/27 area proved a too high hurdle for now. 1.06/1.0341 serves as the ST trading range short-term.

News Headlines

•          Senate Democrats are working on shrinking the amount of tax increases planned in president Biden’s economic package. The $2.2tn deal approved by the House last year would be paid for by $1.5tn in tax increases but met fierce resistance from Democratic Senator Manchin. His vote is crucial in the 50-50 split Senate to get Biden’s Build Back Better deal through. Manchin and Senate Majority leader Schumer are close to agreeing that the overall tax increase amount would be roughly $1tn and that half of that needs to go to deficit reduction over 10 years. Time is ticking for Biden and the Democrats. By the end of September, the budget resolution that allows them to pass the bill with a simple majority, expires. Many believe the bill probably needs approval already next month, before August recess.

•          China’s (official) PMI’s extended a post-lockdown rebound in June. Both manufacturing and non-manufacturing re-entered expansion territory for the first time in four months, the latter (54.7) more convincingly than the former (50.2). Orders are on the rise again, especially in the services sector and output is gaining traction. Business activity expectations for the services sector soared. Employment remains in a soft spot (below 50 in both sectors). While the PMI’s are good news, there is still reason for caution. The recovery remains fragile with China sticking to its Zero-Covid strategy, meaning restrictions could be tightened again and at short notice.


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 & 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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