Tuesday, July 19, 2022

Daily Market Overview

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• The debate about a 25 or 50 bps ECB rate hike is at least as hot as temperatures outside today. It is the central bank itself, or rather “people familiar with the discussions”, that fueled speculation just two days ahead of the policy meeting this Thursday. Citing those sources, Reuters reported that ECB policymakers are looking more closely at a half-point rate increase this week instead of the 25 bps move ECB president Lagarde and many others flagged earlier. It has a Fed flair all over it. Back in June, it nudged markets during the quiet period towards a 75 bps hike. It also used its contacts in specialized press to have the word out. Shortly after the 50 bps rumours, quotes rolled over the screen that Lagarde is doubling down on having the Transmission Protection Mechanism ready by Thursday. Governors are said to negotiating its conditionality and legality still. It feels as a quid pro quo: a stronger rate lift-off in return for a new bond buying program. European bond markets in any case were quick to pick it up. German yields shot up with the front end of the curve underperforming as money markets price in a fifty-fifty chance for a bolder ECB move. Yields changes range between 0.3 bps (30y) and 8.5 bps (2y). European swap yields add 1.6 bps to 9.9 bps in a similar bear flattener. US yields continue to consolidate. They ease up to 2.5 bps with the wings outperforming the belly. The US10y yield is hovering around the 3% barrier. European stocks dipped to intraday lows but soon found their composure. A gradual bottoming out turned losses of 1% into gains of 0.8% for the EuroStoxx50. Wall Street opens with gains of some 1%.

• Euro bulls also liked the Reuters report. The common currency strengthened, not least against the US dollar. EUR/USD is on track for a close north of 1.02 for the first time in two weeks. That still leaves the first meaningful resistance at 1.035 at some distance. Capturing that level is needed to call off the immediate downside alert. There is definitely dollar weakness involved too though. The trade-weighted DXY’s slide extends to 106.67. USD/JPY retreats further from cycle highs to 137.62. EUR/GBP also rose. The British labour report was near expectations and deprived sterling of means to counter euro vigor. The pair (0.8516)  is currently testing 0.8509/12 (23.6% recovery of the March 2020 – 2022 decline/March 2022 interim high) resistance level. Perhaps Bank of England governor Bailey and UK Chancellor Zahawi come the pound to the rescue when they speak at the annual financial and professional services dinner at Mansion House tonight. Cable (GBP/USD) extends a bottoming out pattern to north of 1.20.
News Headlines

• The Hungarian parliament today approved the Government budget for 2023. The Government of PM Orban aims to reduce next year’s budget deficit to 3.5% of GDP compared to an expected shortfall of 4.9% this year. The budget assumes only a modest slowdown in economic growth to 4.1% from 4.7% expected this year. The National bank of Hungary expects growth between 2-3% next year. The budget sees inflation at 5.2% in 2023. MNB June forecasts range between 6.8% and 9.2%. Amongst other measures a windfall tax on big companies and removing a cap on utility prices should contribute to a lower budget deficit. Lower government demand also should help reducing the current account deficit which is a negative factor for the Hungarian forint. A milder global risk sentiment, first steps of fiscal consolidation and last week’s aggressive MNB 200 bps rate hike are taking some pressure off the forint. EUR/HUF currently trades near 400, compared with last week’s historic low levels near EUR/HUF 415.

The US housing market continues to slow down as higher interest rates are filtering through in activity in the sector. Housing starts dropped another 2.0% to an annual rate of 1559k, the lowest level since September last year. The June decline comes on the back of a sharp fall of 11.9% in the previous month. Building permits eased a more modest 0.6% M/M in June after declining 7.0% the previous month. Last week Fed’s Waller indicated that he would also take housing data into account in assessing excesses demand at the July 27 policy decision.

Graphs & Table

European 2y swap yield surges after ECB puts forward possibility of a bigger-than-expected 50 bps rate hike

Trade-weighted dollar extends recent correction lower. Stronger euro also enters the equation today.

EUR/HUF: forint tests first resistance levels on (steps to) fiscal consolidation and constructive risk setting.

EuroStoxx50: rebound enters third day but is looking at nasty resistance coming closer.

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). Read the full disclaimer.

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