Wednesday, May 4, 2022

Daily Market Overview

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• Yesterday’s market moves may have been atypically erratic ahead of key events (see second bullet), but today’s for sure weren’t. US stocks open mixed while European equity markets fluctuated around opening levels and currently trade with minor losses of around 0.15%. Bond yields in the euro area gapped higher at the start of cash market trading before paring some of the gains. Maybe it were ECB Board Executive Schnabel comments in an interview late yesterday resonating in early European dealings. She said the central bank needs to act to prevent high inflation from becoming entrenched in people’s expectations and called a rate increase in July possible. Euro area money markets indeed are just shy of fully pricing in such a scenario. Anyway, German yields add 0.9 (2y)/3.9 bps (5y) in a daily perspective with the belly of the curve underperforming wings. Both the German 10y yield and the European 2y swap yield again banged on the 1% door but those resistance levels didn’t give in (yet?). The US curve bear flattens ahead of tonight’s Fed policy meeting that will pave the way for a series of aggressive rate hikes. Yields add up to 4.3 bps (2y, hitting a new cycle high). FX market moves are extremely limited. The currency in focus today, the USD, is trading marginally on the backfoot. EUR/USD ekes out a negligible gain to 1.055, the trade-weighted DXY eases to 103.25. Both still trade near multi-year lows/highs respectively. US data today included the ADP job report. With a 247k job creation, the bar wasn’t met (383k) but in combination with yesterday’s exceptional JOLTS data it still suggest a labour market in (more than) full swing. The US services ISM after this report gets published. US Treasury also announced it will reduce the size of  the 2-, 3-, and 5-year note auctions by $1 billion per month in the next quarter. It also anticipates decreases of $1 billion to 10-, and 30-year note auction sizes starting in May. It’s the third straight reduction and possibly not the last even at the eve of the Fed starting quantitative tightening, citing “strong” federal tax revenues. No word on sterling here today. The Queen’s money’s time to shine is tomorrow (BoE).

• It’s Fed-day. The central bank will almost certainly raise policy rates by 50 bps to 0.75-1%. Such a bigger-than-usual hike stretches back to 2000. What’s more is that it will be the first of several similar moves, making the current tightening cycle the most aggressive in almost three decades. Powell recently embraced such heavy frontloading. During the press conference, he’ll stress the importance of bringing the policy rate as soon as possible to neutral territory, estimated at 2.4%. Current circumstances (red hot labour market, sky high inflation) even warrant an outright restrictive policy rate. We therefore see little reason for Powell to forcefully push back against market expectations of at least four consecutive 50 bps hikes and a peak policy rate by mid-2023 between 3.25 and 3.5%. We will also see plans for a fast balance sheet roll-off formalized. March Meeting Minutes already revealed intentions of going from zero to $95bn per month in just three months’ time, extracting liquidity at a much faster pace than previously. Not only did the Treasury market lose a huge buyer a few months ago, from tonight on, the Fed will actually have become a net-seller. All this suggests both the USD and US bond yields remain supported.
News Headlines

• The Reserve Bank of India raised its policy rate unexpectedly, in between meetings, by 40 bps from 4% to 4.4%. It’s the start of a tightening cycle and the first rate hike since mid-2018. RBI governor Das said that inflation must be tamed in order to keep the Indian economy resolute on its course to sustained and inclusive growth. He warned for the risk that prices stay at current or higher levels for too long (particularly food) and that expectations become unanchored. Headline inflation rose to 6.95% Y/Y in March, printing above the 2%-6% target range for a third month running. The Indian rupee initially gained ground, but failed to hold on to those moves. At USD/INR, the currency continues to trade near historically weak levels.

Graphs & Table

EuroStoxx50 unable to recoup previously lost resistance amid directionless trading

German 10y yield: another test of the 1% symbolic level. How long will that resistance level last?

Cable (GBP/USD): Fed (tonight) and BoE (tomorrow) to decide over the pair’s course.

Brent oil ($/b) nears first resistance levels (upward sloping trendline) ahead of tomorrow’s OPEC meeting

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).
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.
The KBC Economics – Markets desk has used reasonable efforts to obtain this information from sources which it believes to be reliable but the contents of this document have been prepared without any substantive analysis being undertaken into these sources.
It has not been assessed as to whether or not these insights would be suitable for any particular investor.
Opinions expressed are our current opinions as of the date appearing on this material only and can be opposite to previous recommendations due to changed market conditions.
The authors of this recommendation do not warrant the accuracy, completeness or value (commercial or otherwise) of any recommendation. Neither are the authors liable to those who receive these recommendations for the content of it or for any loss or damage arising (whether in tort (including negligence), breach of contract, breach of statutory duty or otherwise) from any actions or omissions of the authors in reliance on any recommendation, or for any claim whatsoever in respect of the content of, or information contained in, any recommendation. Any opinions expressed herein reflect the judgement at the time the investment recommendation was prepared and are subject to change without notice.
Given the nature of this advice (linked to currencies and interest rates) , the advice is overall not specific in nature.   As such there is no reference to any corporate finance contract and as such there is no 12 month overview based on the different advices.
This document is only valid during a very  limited period of time, due to rapidly changing market conditions.

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