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• What a way to start the week. The US inflation print published on Friday continued to reverberate through markets. It already began in Asian dealings before traders in the region smoothly passed on the baton to Europe and the US. Bonds again took center stage. Both German Bunds and US Treasuries fell off a cliff at a pace that was even worse than Friday’s for the former and only marginally less intense for the latter. Changes range from 11.3 bps (30y) to 15.9 bps (2y) in the US. A closely watched “recession predictor”, the 10y/2y spread temporarily turned negative. The 10y reference rate surpassed the previous cycle intraday high of 3.20% and is currently attacking the 2018 top at 3.26%. These incredible moves happen just days before Wednesday’s Fed meeting at which markets clearly expect the central bank to be even more aggressive than already is the case. Money markets currently price in 175 bps tightening by the September meeting. This implies they expect the Fed by then not to continue with 50 bps moves seen in May to July but with an even bigger-sized 75 bps rate hike. German Bunds add 4 bps (30y) to 16.2 bps (2y) with the latter taking out the 1% level for the first time in more than a decade. European swap yields even skyrocket more than 20 bps (2y)! Speculation builds for the ECB to catch up with more than just one jumbo-sized (50 bps) rate increase in September. Another one for October is already fully discounted. UK Gilts outperform today, printing yield gains of “only” 6.2 bps in the 2y and 5y bucket. In an almost identical session to Friday’s, equities are once again under selling pressure. Stocks shed 2.3% in Europe. Wall Street opens with losses up to 2.8% for the Nasdaq.
• The risk-off is also the dominant theme for currency markets. The Japanese yen outperforms peers despite the sharp core bond yield rise. EUR/JPY retreats from 141.35 to 140. USD/JPY tested the 135 big figure before paring all gains (and more) back to 134. The greenback takes a honorable second place, enjoying from both risk aversion as another spike in US (real) yields. DXY (trade-weighted dollar) jumped from 104.15 to near the previous cycle high of 105. Sterling is trading on softer footing. Today’s batch of economic data (industrial production, monthly GDP numbers) was unconvincing and stretches the dilemma for the Bank of England to its limits. More data follows tomorrow (labour market) and Friday (retail sales) with the UK central bank policy meeting in between (Thursday). EUR/GBP rises from 0.854 to 0.859 currently. GBP/USD (1.2178) teeters on the brink of falling below the previous YtD low at 1.2156 after two days of heavy declines.
• The National Bank of Belgium provided an update of its projections for the Belgian Economy. After a solid increase in activity in Q1, the economy is expected to barely grow in the near term, mostly due to the impact of high inflation on private consumption. Still, growth should pick up again by the end of the year. The NBB sees economic growth for this and next year unchanged from its March forecast at 2.4% and 1.5% respectively. 2024 growth was upwardly revised from 1.9% to 2.0%. The NBB expects activity to stay above potential in the next two years. The labour market should continue to be highly robust: job creation is expected to slow down a little but remain positive. Inflation has risen under the impetus of rising energy prices and second-round effects but is believed to have reached its peak in May and should gradually fall back as energy prices moderate and supply chains normalize. It is projected to come back down from an average 8.2% in 2022 to 1.3% in 2024. The budget deficit is estimated at 4.5% of GDP for 2022 and is forecast to further deteriorate over the projection period (5.0% in 2024). Government debt is on a rising path, going from an expected 105.3% of GDP to 110.9% in 2024.
Graphs & Table
European 2y swap yields surges in wake of ECB hawkish turn and US CPI showing need for decisive action.
Cable (GBP/USD) on the verge of losing important support at YtD low.
Trade-weighted DXY nears cycle high of 105. Who’s ready to stop king dollar?
S&P500 opens at and eases below 38.2% retracement support level (3815). Losing it implies a return to 3580.
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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