Tuesday, May 31, 2022

Daily Market Overview

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• US investors returned to trading desks following the long weekend (Memorial Day Holiday). US Treasuries started weak, catching up with yesterday’s Bund losses while also paying attention to hawkish comments by Fed Waller (+50 bps at each and every meeting this year) and a WSJ op-ed by US President Biden. The latter worked out a three-pillar plan to combat inflation which he’ll exceptionally discuss with FOMC governor Powell and US Treasury Secretary, and former Fed president, Yellen. Biden clearly states that the first line of defense and prime responsibility to control inflation lays at the Fed. Fighting inflation is the top economic challenge right now with the Fed and government ready to pay an economic price if necessary. A final element contributing to the weakness in core bonds is Brent crude’s rise to $124/b, the highest level since 2012 apart from a brief spell early March. The Chinese economic reopening (demand-side) and European oil embargo against Russia (supply-side) are at play. From a technical point of view, the US 10-yr yield extensively tested 2.71% support (Apr 2027 low and neckline potential double top formation) last week. A break lower didn’t occur, adding to the weakness in Treasuries. US investors aren’t afraid that this week’s key eco releases might start showing some signs of weakness. US yields add 6.8 bps (2-yr) to 9.9 bps (10-yr) compared with Friday’s close with the belly of the curve underperforming the wings. German Bunds caught a very brief bid at the start of the European session, but rapidly went back into sell-off mode. German yields rise by 2.7 bps (30-yr) to 7.2 bps (5-yr). The feared EMU inflation acceleration occurred in May with prices rising by 0.8% M/M (from 0.6% M/M in April and vs 0.6% consensus) to 8.1% Y/Y (EMU record vs 7.8% consensus). Underlying core inflation increased from 3.5% Y/Y to 3.8% Y/Y. Available details/subcategories nearly all set EMU highs: from services inflation (3.5% Y/Y from 3.3% Y/Y) over food, alcohol and tobacco (7.5% Y/Y from 6.3% Y/Y) to non-energy industrial goods (4.2% Y/Y from 3.8% Y/Y). The inflation print once more highlights the necessity for the ECB to start normalization policy quickly and to not look back once the process effectively starts. Italian (+6 bps), Portuguese (+3 bps) and Spanish (+3 bps) 10-yr yield spreads vs Germany widen today. The pace of the bond sell-off is again impacting risk sentiment. Main European bourses lose over 1% at the moment. Risk sentiment, the US Treasury underperformance and failure to take out first resistance at EUR/USD 1.0758/1.0806 all contributed to today’s return action lower in the currency pair. EUR/USD is changing hands just below 1.07 for the moment. EUR/GBP remains steady in the low 0.85-area.
News Headlines

• The Canadian economy expanded by 3.1% q/q annualized in Q1 vs 5.2% expected. Still-solid growth was supported by strong private consumption, business investment and an inventory build-up. A steep drop in exports, in part due to Covid- and maintenance-driven production disruptions in the vast oil sector, was only partially compensated by faltering imports. Today’s reading is in line with the Bank of Canada’s April forecast (2.8% q/q ann.). The BoC is thus set to raise rates by 50 bps again to 1.5% tomorrow. Market expectations are for another such move in July with speculation building for September too. The loonie loses against a superior USD today. USD/CAD rises to 1.268.
• The Hungarian central bank raised policy rates by 50 bps to 5.90% today. In the policy statement, the MNB said strong growth at the beginning of 2022 will probably slow in coming quarters due to subdued external demand. Inflation, already at 9.5% (10.3% even in the core), is expected to increase in coming months. This warrants further tightening. But there is a slight change in the wording with the MNB no longer speaking about “increased” fundamental inflation risks. It has also assigned itself with the “key task to set an optimal interest rate level that ensures the sustainable achievement of the inflation target”, suggesting more moderate tightening may be appropriate to find that level. The Hungarian forint loses marginally to EUR/HUF 395 though losses were already there going into the policy decision.  Hungarian swap yields add 5-7 bps across the curve.

Graphs & Table

US 10-yr yield bounces off important support at 2.71%

EUR/HUF 400 looming at the horizon. Will the MNB in the next weeks face fresh pressure to accelerate its tightening cycle?

Trade-weighted dollar shines as US Treasuries underperform in fragile risk environment. Biden gives Fed all clear to battle inflation

S&P 500: …and that’s it for the 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.
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