Tuesday, 1 March 2022
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•          The ongoing military action by Russia in Ukraine and markets assessing the consequences of reciprocal sanctions between Russian and the West caused an outright risk-off start for the week. Sentiment stayed nervous throughout the day, but equities gradually rebounded off intra-day lows. US equities closed mixed with the Dow losing -0.49% but Nasdaq gaining 0.41%. The EuroStoxx50 lost 1.17%. Until now, the Ukraine crisis didn’t change expectations on Fed or ECB policy in any profound way. The jury is still out, but yesterday (part of the interest rate) markets showed some cracks as investors pondered the potential impact on growth. However, some end of month positioning maybe was also in play. The US yield curve bull flattened with yields declining between 14.75/13.75  bps (5 & 2 y) and 11.25 bps (30-y). The 10-y real yield almost lost 20 bps. Inflation expectations rose 6.3 bps. A similar move occurred in Europe with German yields declining between 16 bps (5-y) and 5.9 bps (30-y). This time, EMU swaps also joined the decline with especially the 5-y losing 16 bps. Fed comments still fully support the case to start policy normalization in March. ECB speakers (e.g. Panetta, Centeno) understandably advocated a gradual approach but we didn’t see a U-turn from the ‘guidance’ of ECB’s Lagarde since the February meeting. EMU inflation data (published tomorrow, risks to the upside after country data) will be key to shape market expectations in the run-up to the March ECB meeting. Currencies followed the intra-day swings in risk sentiment. The dollar opened strong but lost gains later. EUR/USD tested the 1.1121 previous support area, but closed at 1.1219. DXY finished at 96.70, only marginally stronger from Friday. Yen gains remain modest after all (USD/JPY close 114.99). The Swiss franc closed below the EUR/CHF 1.03 handle. Oil returned to the $100 p/b area after opening near 104/5 in Asia. USD/RUB closed near 105 even as the CBR raised the policy rate to 20%. In the CE region, the zloty (EUR/PLN 4.70) and the forint (EURHUF 371) continue to trade at levels that don’t fit the CB’s anti-inflation policy.

•          This morning, Asian markets found some kind of short-term equilibrium with regional markets mostly gaining 0.5%/1.0% +. China PMI’s printed slightly stronger than expected and at 50+ levels. US yields regain 3-4 bps across the curve. The dollar (DXY 96.84, EUR/USD 1.1205) and oil 99.9 are trading with a tentative upward bias.
Usually, US (and EMU) data take center stage at the start of a new month. However, the US ISM (expected marginally stronger at 58.0) probably won’t be a major driver for trading. German CPI (expected 0.7% M/M, 5.4% Y/Y HICP) might be get some more attention after upward surprises in other countries. Even so, with the war in Ukraine ongoing (Kyiv) a cautious investor mood probably will persist. We especially keep a close eye at the 5-y sector of the European (and also US) curve after yesterday’s break lower. On the FX markets, the dollar retains a small advantage but at the same time isn’t able to break key resistance levels (DXY 97.44/73, USD/JPY 116.34, EUR/USD 1.1120/1.1192. EUR/GBP also holds a directionless trading pattern between 0.83 & 0.84.

News Headlines

•          The Reserve Bank of Australia as expected didn’t change its 0.10% policy rate at the meeting today. Inflation is high and has increased due to rising energy prices and supply chain bottlenecks at a time of strong demand which has picked up again after the Omicron setback. The war in Ukraine has pushed many commodity prices higher as well. The RBA expects underlying inflation to ease from 3.25% later this year to 2.75% over 2023. But inflation has to durably reach the 2-3% target before the RBA considers rate hikes and there is much uncertainty about that currently. For this to happen the still-modest wage growth has to pick up. The strong labour market will help achieve that over time. The Aussie dollar barely budges this morning. AUD/USD hovers near opening levels around 0.726.

•          Pressure on UK Chancellor Sunak to abandon the planned payroll tax increase continues the grow. Make UK, one of the country’s biggest (manufacturing) employer groups, said it is “illogical and ill-timed”, echoing similar calls from CBI and the Federation of Small Businesses. It would aggravate the cost of living crisis, they said. A survey by Make UK found that 60% of its 282 members will cut back recruitment as a result of the tax while 71.5% would pass the cost on to customers, further increasing inflation.


Long term (real) EU bond yields surged after the ECB hinted it may stop net bond buying sooner than previously expected. The break into positive territory has been confirmed. The German 10-y yield also cleared 0.15% resistance (61.8% 2018-2020 retracement), with 0.40% being the next reference. Geopolitics currently trump the monetary policy storyline, however declines in yields remained modest for now.

The Fed’s hawkish policy turn caused a surge in real yields. The US 10-yr yield took out the October top at 1.7%. The January CPI release triggered a first brief return above 2%. Fed talk since the escalation in the geopolitical narrative suggest policy normalization won’t be delayed.

The ECB changed its tone dramatically. Views on temporary inflation have changed. Net bond buying is poised to end sooner (in Q3?), allowing for a first rate hike later this year (Q4). EUR/USD left the lows behind. Short-term momentum favors the dollar again, especially in current uncertain circumstances. The pair tested the 2022 low but avoided a break.

The BoE hiked its policy rate to 0.5% in February with the biggest possible minority even voting for a 50 bps increase. Further tightening is in the pipeline. The pair tested 0.8282 support but rebounded quickly.

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.
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