Tuesday, August 30, 2022

Daily Market Overview

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• National European August inflation readings today printed in line with forecasts. Spanish inflation was slightly lower compared with July (10.3% Y/Y from 10.7% Y/Y), but remains in double digit territory. German inflation accelerated as forecast by 0.4% M/M, from 8.5% Y/Y to 8.8% Y/Y. Next month could see a leap towards 10%+ with one-off cheap transport prices and a reduction in road fuel taxes set to end. Belgian inflation accelerated to its highest level since 1976 (9.94% Y/Y; see below). These national numbers suggest that tomorrow’s EMU reading will be near/at consensus as well. Economists put forward a monthly dynamic of 0.4% M/M, with the Y/Y reading slightly rising from 8.9% to 9% for the headline number and from 4% to 4.1% for the core gauge. Core bonds initially traded volatile. It’s actually the kind of number which could pave the way for some consolidation near sell-off lows with next week’s ECB meeting in mind. However, going into US dealings, core bonds gradually face more selling pressure again. The move likely coincides with an intraday U-turn of gas prices. They initially extended yesterday’s correction in anticipation of EC president von der Leyen’s announcement of structural reforms to the power market and on temporary short term fixes to relief some pressure on household and enterprise budgets. Headlines that Gazprom will cut deliveries even more to French utility Engie after a disagreement over contracts were at first overruled. German yields rise by 0.7 bps (10-yr) to 2.6 bps (2-yr) at the moment with the wings of the curve underperforming the belly. The US yield curve turns more inverse with yields rising by 0.6 bps (30-yr) to 2.3 bps (2-yr). The single currency mirrored the move in gas prices (and core bond yields for that matter). EUR/USD moved from parity to 1.0050 before drifting south again to 1.0025. Stock markets joined the journey with main indices returning half of today’s max gain of 1.5%. The technical break higher in EUR/GBP yesterday (> 0.8512) met with follow-up action today. The pair reaches above 0.8550 with intermediate resistance at 0.8585 in sight. It’s the final hurdle ahead of the YTD top of 0.8721.
News Headlines

• Belgian inflation accelerated from 9.62% to 9.94% y/y (0.81% m/m) in August. The near-double digit print is the fastest since 1976. Energy prices remain the key driver, jumping 49.81% y/y and adding 4.43 ppts to the headline figure. Natural gas unsurprisingly shows the sharpest increase (106.9% y/y, 12.3% m/m). Electricity came in second (57.2% y/y, 11.5% m/m). Food prices rose 9.71% y/y, delivering a 1.92 ppts contribution. Core inflation also quickened, from 5.49% to 5.74% amidst rising prices for services (5.36% y/y). The top three in biggest declines were seen in television equipment (-12.4% y/y), smartphones (-8.8% y/y) and mobile phone services (-4.9% y/y).

• Hungary’s central bank (MNB) lifted policy rates by 100 bps to 11.75%, surpassing the peak seen prior to the 2008 recession (11.50%). Interest rates on the one-week deposit instrument will be raised similarly on Thursday. The MNB held an outright hawkish tone even as it mentioned a clear slowdown in economic growth since the beginning of June. Inflation at 13.7% (16.7% even for core inflation) remains far too high and widespread, keeping inflation expectations at an elevated level as well. In achieving the 3% (+/- 1 ppt) target, second-round effects need to be avoided and inflation expectations anchored. Aside from the rate hike and to enhance monetary transmission further, the MNB introduced three additional measures: an increase in the required reserve ratio, central bank discount bill auctions and a long-term, liquidity-sterilizing deposit instrument. The Hungarian forint, though still very weak, reacted positively by strengthening from EUR/HUF 408 to 403.9 currently. Hungarian swap rates add as much as 25 bps, parting ways with other CE swap rates.

Graphs & Table

EUR/HUF: forint catches a break after hawkish MNB policy meeting

UK 2-yr yield touches 3% for the first time since 2008 as markets discount the most aggressive tightening cycle amongst G4 by the BoE

EUR/CHF: prelude of better times ahead for the single currency against other currencies as well?

Brent crude: Iraqi exporters haven’t been affected by violence in Baghdad. Pressure might build again going into Sept 5 OPEC+ meeting with reduced supply the likely outcome

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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