Wednesday, 1 June 2022
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•          Core bonds were back on offer at the final trading day of the month. US Treasuries underperformed German Bunds on a combination of hawkish Fed speech (Waller), better-than-expected economic data (Chicago PMI, Conference Board consumer confidence) and a general catch-up move after reopening from a long weekend. US yields added 8.1 bps to 10.9 bps with the belly underperforming the wings. Yields in Europe/Germany rose within a range of 5 and 7 bps across the curve, inspired by yet another record EMU inflation print (headline 8.1%, core 3.8% with strong monthly dynamics) for May. Action on bond markets set the tone for equities too. Europe and the US inched 1.36% and about 0.5% lower respectively. Oil prices surged initially by a little less than 3% following Europe’s ban on Russian imports, serving as a common factor pushing up yields further. But a WSJ article triggered a sharp intraday reversal of >4%. The report was about OPEC mulling to exempt Russia from its oil-production targets since the country hasn’t met its quota for several months now. If that were to happen, it could pave the way for the likes of Saudi Arabia and the UAE to pump up significantly more crude. The cartel has its monthly meeting tomorrow. The dollar profited from the marginal equity risk-off and rising yields. Some end-of-month rebalancing after the recent string of USD losses may have been at play too. EUR/USD erased the Monday gains to finish at 1.073. USD/JPY confirmed the bottoming out process with a sharp jump to 128.67. EUR/GBP had no clue what side to pick. The pair closed unchanged in the low 0.85 area.

•          Stock markets in Asian dealings trade mixed. China underperforms after the private manufacturing PMI (48.1) rose less than the official readings had suggested a few days earlier. US bond yields extend their rise though on a more gradual basis. The 10y yield adds 2.5 bps, moving further away from important support at 2.72%. The dollar starts the new month on solid footing. EUR/USD inches further south towards the 1.07 big figure. We think current moves on bond and FX markets set the tone for the rest of the day. On the economic data front, the US kicks off an interesting remainder of the week with the manufacturing ISM (seen easing to 54.5) and JOLTS job openings today, followed by the ADP jobs report tomorrow and culminating on Friday with the official payrolls and the services ISM. The Fed’s monetary policy cycle starts tonight with the release of the Beige Book. Speeches by Lagarde, Lane and Knot all take place right before the quiet period ahead of the June 9 policy meeting begins. It is worth monitoring nevertheless.

News Headlines

•          The Australian economy performed well in the first quarter, growing by a bigger-than-expected 0.8% Q/Q and 3.3% Y/Y (was 3.6% Q/Q and 4.4% Y/Y in Q4 last year). Domestic demand was strong, with consumption adding 0.8ppts. Government expenditure also supported growth. The domestic performance was partially eroded by a negative contribution from net exports. The GDP price deflator printed at 2.9% Q/Q, the fastest pace since 1988. The combination of solid domestic demand and rising price pressures supports the case for the RBA to continue its hiking cycle after it raised its policy rate for the first time from 0.1% to 0.35% at the May meeting. Markets discount another 25 bps rate hike at the June 7 meeting. The 3-y Australian government bond yield jumps 8.5 bps this morning. The Aussie dollar is losing marginally (0.7165), but this is mainly due to overall USD strength.

•          In interview with Reuters, the head of the Czech Debt management department, Petr Pavelek, indicated that the country is considering a new euro denominated bond this year, possibly before the summer. The country also might issue Treasury bills in euro for the first time. The bonds will be issued under Czech law rather than as traditional Eurobonds. For now, Pavel expects that the new issue won’t be bigger than €1 or 2 bln, even as the debt chief indicated that a separate discussion is under way whether the country should raise overall euro borrowing to take advantage of the rising interest rate differential. The euro denominated bond might have a longer maturity than existing bonds maturing in 2024 and 2027. Czech bonds are on the ECB eligible list to serve as collateral for Eurosystem operations.


The ECB will end net asset purchases in June. A first rate hike is likely in July. Speculation has caused real yields to bottom out, compensating for inflation expectations having corrected lower from record highs. The worrying growth outlook complicates the picture and triggered a first meaningful correction since the start of the Russian invasion. Support at 0.80% stood firm though and was followed by return action back to 1.0%.

The Fed started its tightening cycle and published an aggressive blueprint for the remainder of the year. 50 bps rate hikes at the next meetings can be taken for granted. Quantitative tightening has started and will hit max speed by September. But the recent yield surge this caused, has eased recently. Yields may be entering a period of consolidation. Important support at 2.72% marks the lower bound.

EUR/USD lost the previous YTD low at 1.0806 and the 2020 bottom at 1.0636. At first, the ECB flagging the rate lift-off in July didn’t help much. However, the 1.0341 2017 low survived. The pair regained 1.0636 mostly on dollar fatigue. It does serve as a sign of easing downside momentum. The next reference stands at 1.0806 with intermediate resistance at 1.0758.

The developing cost-of-living crisis seems to hit the UK economy first and the hardest. Weak economic data toughen the Bank of England’s dilemma in battling inflation with doubts filtering through in markets. Open division within the BoE and the limited room for further tightening pushed EUR/GBP temporarily above the 0.8512 level. A sustained break would be a bad omen for sterling.

Calendar & Table

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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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