Tuesday, 1 February 2022

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•          Wall Street tried to shrug off a rough month by printing impressive back-to-back gains. The Nasdaq outperformed, eking out another 3%+ gain. January is still the worst month for the tech-heavy index since March 2020 though. US yields rose with the belly outperforming the wings. The short end added 1.5 bps even as some Fed governors including Daly leaned against current market expectations of five rate hikes. Fed’s Esther George in an interview preferred “more aggressive action on the balance sheet [that] could allow for a shallower path for the policy rate”. She warns that doing the opposite could flatten the yield curve and distort credit incentives. Other changes vary from 1.5 bps (2y) over flat (7y) to 3.4 bps (30y). German/European yields surged. European GDP growth was largely in line with expectations (0.3% q/q) but German HICP eased much less than markets (and the ECB) hoped it would. Inflation fell from 5.7% y/y to 5.1% y/y with very strong monthly dynamics (0.9% m/m). It poses risks for the European figure to be released tomorrow and ahead of the ECB on Thursday. Germany’s curve bear flattened with yields 7.9 to 8.5 bps higher for the 2y and 5y. The 10y yield (+5.6 bps) closed in positive territory for the first time since 2019. EUR/USD profited from the rising interest rate differential as well as the upbeat risk climate. The pair rebounded from the 1.1163 support area to back north of 1.12, helped by dollar weakness too (DXY eased from 96.54 from 97.24). The same applied for EUR/GBP: bouncing off recent lows around 0.83 to 0.835.

•          The RBA grabs most attention during Asian-Pacific dealings today (see headline below). The Australian dollar is little affected by the decision. Most other major currencies trade muted too. CHF tops the board. Core bonds have a slight upward bias. Most stock markets show small gains. China remains closed for the week.

•          Today’s economic calendar gets moderately interesting with US ISM business confidence for the manufacturing sector. Consensus expects an easing from 58.8 to 57.5. We keep a close eye at the delivery times component in particular to have a pulse on supply strains. The figure won’t affect the general trading patterns though. Germany’s 10y yield push into positive territory is symbolically and technically important. We look out for follow-up gains in the run-up to the ECB. EUR/USD has still some way to go before capturing first meaningful resistance, situated at around 1.13. A protracted rebound is only likely when the ECB finally takes the turn. British money markets are looking forward to the Bank of England on Thursday. A 25 bps rate hike is discounted. For the time being EUR/GBP 0.83 looks pretty solid.

News Headlines

•          The Reserve Bank of Australia kept its policy rate unchanged at 0.1%, but decided to cease further purchases under the bond purchase programme after February 10. Governor Lowe stressed that this does not imply a near-term increase in interest rates. The RBA sticks with its guidance to wait until actual inflation is sustainably within the 2%-3% target range. The RBA sees underlying inflation increasing further in coming quarters to around 3.25%, before declining to around 2.75% over 2023. Uncertainties remain about how persistent the pick-up in inflation will be as supply-side problems are resolved. Wage growth picked up but also remains modest even as the unemployment rate already fell to 4.2% in December. The central bank puts it at 3.75% at the end of 2023. The Omicron outbreak didn’t derail the economic recovery with the RBA forecast GDP growth of around 4.25% over 2022 and 2% over 2023. The Aussie dollar holds near AUD/USD 0.7050. Money markets remain convinced that the RBA will pull the trigger on interest rates in coming months (June) even if Lowe pushes back against early tightening expectations.

•          Germany, the Netherlands, France, Belgium and Italy expressed some worries over the Chips Act proposal from the European Commission. The EU wants to make 20% of the world’s chips by 2030. The 5 nations want to avoid a subsidy race resulting in an overproduction of chips, and rather suggest state aid to go to innovation more than cutting-edge production plants. They agree that the EU needs to keep their markets open to and open for other continents instead of focusing on reshoring only.


Long term EU bond yields sprinted higher end December after the ECB didn’t really commit to strong asset buying post-PEPP with a potential end by late 2022. The move was driven by higher real rates. The break above -0.20% was a first technical hurdle and was eventually followed by a return into positive territory by a higher-than-expected German CPI.

The US 10-yr yield took out the October top at 1.7%. The psychological 2% mark is next resistance. The Fed’s hawkish policy turn triggered a surge in real yields. A March rate hike and June start of balance sheet reduction become the most likely scenarios. Core bonds and stocks to sell-off in lockstep again?

The dollar fell prey to profit taking after December inflation data. EUR/USD was able to escape the 1.1186/1.1386 trading channel in place since end November, but the pair failed to take out next high-profile resistance at 1.1495 as surging US real yields came to the greenback’s rescue. The November low at 1.1186 was extensively being tested.

EUR/GBP fell below the previous sell-off low at 0.8381 in the wake of the Bank of England’s first rate hike since July 2018. UK Gilts underperform German Bunds with another rate hike by the BoE in February being our base case and granting the UK currency short term interest rate support. Next target EUR/GBP 0.8282 remained out of reach as dismal retail sales and risk aversion triggered short term short squeeze.

Calendar & Table

Note: All times and dates are CET. More reports are available at KBCEconomics.be 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.

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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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