Monday, April 11, 2022

Daily Market Overview

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• The new week starts the way it ended last Friday: with a new bond sell-off. The trend of higher yields is definitely not new but received new impetus from the Fed and ECB Meeting minutes last week. Both highlighted the fact that monetary hawks are either firmly behind (Fed) or are in the process of taking over the steering wheel (ECB). The fact that the economic calendar is semi-backloaded with US CPI due tomorrow and the ECB meeting on Thursday did not keep markets sidelined as they usually do. Quite the opposite actually: it seems that bond markets are frontrunning. They do have a point though, especially with respect to the ECB. We wouldn’t be surprised if the outcome of the April meeting showed a further shift to the hawkish side of the spectrum. Core bonds slide with German Bunds underperforming US Treasuries. Yields rise 8.3 bps (2y) to 10 bps (30y), steepening the curve with moves mainly driven by real rates. The 10y yield (+9.8bps) is attacking the 2018 high of 0.80%. A break higher paves the way towards the 2015 resistance area around 1%. European swap yields add 5.3-8.3 bps. The 2y is testing the 2013 resistance of 0.78% with euro area money markets raising their ECB bets by the day. They currently discount two 25 bps hikes and counting by October. The US curve bear steepens too in an offshoot of the rapid quantitative tightening pace (targeting the longer end) as suggested by last week’s Minutes ($95bn per month). Changes range from 3.1 bps (2y) to 6.3 bps (30y). The 10y reference finds itself in the resistance zone of 2.76%-2.80%.

• The Japanese yen on FX markets catches the eye. Minor risk-off is not even close of an enough support against the surge in core bond yields. EUR/JPY convincingly surpasses 136 and is on track for the highest close since early 2018. USD/JPY crushes the 125 handle it tested end of March (125.48) to trade at the highest level since mid-2015. The Norwegian krone is second to last in the G10 club (see below). The euro opened strong this morning. It enjoyed a minor relief/stop-loss rally after Macron held the upper hand over Le Pen in Sunday’s first round of the presidential elections. They will face each other in the second round on April 24 in a repeat of the 2017 elections. The race to the Elysée however is much tighter than it was back then. The common currency in the meantime pared some of those early gains, especially against the USD. EUR/USD trades flat at 1.088 after having touched an intraday high of 1.095. EUR/GBP was a copy paste; gapping higher above 0.84 at the open only to give up on all gains. Sterling itself is relatively well bid too, despite disappointing industrial production figures this morning.

News Headlines

• Of late most inflation releases surprised to the upside. Norwegian March inflation was the exception to the rule. Both headline and core inflation printed softer than expected. Headline inflation rose 0.6% m/m to be up 4.5% y/y. Core inflation rose a modest 0.3% m/m, leaving the y/y figure unchanged at 2.1%. The Norges Bank started a gradual rate hike cycle in December. In its March policy report, the NB indicated to hike quarterly with a next step at the June meeting. It forecasted the policy rate to reach 2.5% at the end of next year. Broader inflationary pressures, however, raised questions whether the NB also should consider faster policy normalisation. Today’s soft core inflation serves as a counterargument. The Norwegian krone, which recently profited from a higher oil price and expectations of higher interest rate support, corrects modestly. EUR/NOK rebounded from the 9.48 area just before the CPI release to 9.5475 currently.

• At the other end of the inflation spectrum, Czech CPI again accelerated to a pace faster than expected. Prices rose 1.7% M/M to be up 12.7% Y/Y. Costs of transportation rose 7.1% M/M, domestic fuels rose 21.7%. Costs related to housing, which has a weight of 26.7% in the basket, had risen 17.6% Y/Y. The CNB raised its policy rate 50 bps to 5.0% at the end March meeting. With risks for inflation to rise even somewhat further in the coming months, another bold rate hike at the next meeting (May 5) is likely. The Czech krona gained modestly today with EUR/CZK trading at 24.42.

Graphs & Table

EUR/NOK: Norwegian krone underperforms after weaker-than-expected inflation dents bets for already cautious tightening cycle.

European 2y swap yield tests 0.78% in the run-up to the ECB policy meeting on Thursday.

EUR/JPY: Japanese yen suffers from core bond yield surge. EUR/JPY trades at highest level since early 2018.

Nasdaq: test of first resistance failed, causing a downward technical correction.

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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