Thursday, 31 March 2022
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•          Rising energy prices after Germany initiated the first of its three-phased emergency plan and red hot European inflation prints from Belgium over Germany to Spain smacked German bunds in real Will Smith style. Short-term yields at some point rose 11.5 bps (2y). The rise was mainly driven by inflation expectations (new 14y high in the 10y). Net changes eventually amounted to 1.3 bps (10y) to 5.5 bps (2y), still underperforming USTs. The American yield curve bull steepened, changing -2.6 bps (30y) to -6.8 bps (3y) during a risk-off session (equities lost 1% amid fading hopes of a de-escalation). Some end-of-quarter repositioning may also have been at play after experiencing the worst month for core bonds in decades. FX markets took aim at the dollar. The greenback slid vs all major peers. A good euro performance at the same time allowed EUR/USD escape the bullish triangle and finish above first resistance of 1.1121. It already tested the next one too around 1.117 but closed just below at 1.116. EUR/GBP extended its recent ascent to beyond the resistance level of 0.847 that marked the lower bound of the 2021 sideways trading range. The mixed core bond performance, a fragile risk sentiment and technical trading supported JPY, especially against the dollar. USD/JPY eased further to 121.83 only to reverse course to 122.25 this morning even as Japanese officials, especially in government circles, are growing more vocal on the yen. Chief cabinet secretary Matsuno this morning said he is closely watching the FX impact on the economy, adding that rapid forex fluctuations are not desirable. The Chinese yuan is holding steady near USD/CNY 6.35 despite declining economic activity (see below). In a broader perspective, the yuan trades remarkably strong given growing monetary policy divergence. EUR/USD and core bonds trade unchanged, equity markets are mixed. Oil slips on the headline detailed below.

•          The Fed’s preferred inflation gauge, PCE deflator, is due in the US today after the CPI measure was released earlier this month. France and Italy will print above-consensus inflation numbers ahead of the EMU figure tomorrow. From a technical point of view, US and especially European rates (German 10y 2018 high at 0.80%, 10y swap yield 2015 high at 1.37%) still have upward potential. The euro is alive and kicking after yesterday’s technical breaks vs the USD and GBP. EUR/USD is testing 1.1186 resistance (Nov 21 low). EUR/GBP tries to overcome the 0.85 big figure .

News Headlines

•          Activity in the Chinese economy as measures by the official PMI’s contracted in March. All three indices dropped below the 50 level that separates growth from contraction. The manufacturing measure declined from 50.2 to 49.5. Most activity related sub-indicators including output, new orders and employment remained or stayed below the 50 mark. At the same time, price indictors continue to rise. Contraction was mainly reported by medium and small enterprises. The non-manufacturing measures also slipped further into negative territory from 47.6 to 45.7. The indices published today probably don’t capture the full impact of the new lockdowns that were imposed in cities like Shanghai. The composite index dropped from 51.2 to 48.8. Despite recent signs of economic weakness, a state council meeting yesterday confirmed that the government maintains its aim to reach about 5.5% growth this year. In this context, the PBOC yesterday reiterated its commitment to support the economy and to try to improve the transmission mechanism of monetary policy.

•          According to sources, the US administration is working on a plan to release over the coming months up to 180mln barrels of oil from its Strategic Petroleum Reserve (about 1mln p/d) in an attempt to cap recent sharp rise in prices. The plan might be revealed later today. It would be the third attempt of the US to try to control oil prices via the release of reserves. The Brent oil price overnight eased from $112+ to $108 p/b. Later today OPEC+ also will decide a further reduction of production cuts. However, sources suggest that OPEC will hold to a gradual output hike. The precious months OPEC+ raised production targets by 400 000 barrel p/d. For May a slightly higher hike of $432 000 b/d might be on the cards.


European yields recovered from the setback by the Russian-Ukrainian war. It will slow down growth but didn’t deter the ECB from formally stepping up the normalization plans. QE is to end in Q3 with a rate hike in the next quarter. Real yields may further bottom out while inflation expectations will probably remain elevated. Resistance at 0.58% fell. Next up: 0.80% 2018 high.

The Fed started its tightening cycle and published an aggressive blueprint for the remainder of the year. A 50 bps rate hike May is likely. The US yield curve extended its bear flattening trend. Plans to shrink the balance sheet will be published in May. Risks for a short-term correction rise as the commodity surge has eased. Medium term, the sell-off on core bond markets isn’t over.

The ECB sticking to – accelerating even – the normalization schedule is a (latent) positive for the common currency. After first protecting EUR/USD’s downside, it now lifts the pair beyond first resistance at 1.1121, calling of the immediate downside technical alert. A return above 1.12 would make the technical picture more neutral.

EUR/GBP took out the first resistances between 0.82 and 0.83. The March ECB and BoE meetings restored some kind of monetary policy balance. The BoE even turned more dovish, but markets question this turn. EUR/GBP is showing signs of bottoming out nevertheless as (near-term) rate support lifts the euro’s spirits.

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).
These market recommendations are the result of qualitative analysis, incorporating room for past experiences and personal assessments. The views are based on current market circumstances and can change any moment. The most prominent input comes from publicly available data, financial news, economic and monetary policies and commonly used technical analysis.
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