Wednesday, 2 February 2022
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•          The most interesting action occurred on German bond markets yesterday. Yields surged further north in the wake of the much smaller-than-expected HICP decline. The short end of the curve underperformed with the 2y yield gapping another 5.8 bps higher to -0.47%. It closed above the -0.50% ECB deposit rate for the first time since 2016. Yields further down the curve added 1.8 bps (5y) over 2.6 bps (10y) to 3.8 bps (30y) with new recovery highs for the former two. Economic data in the US had little impact. The manufacturing ISM came in at a strong 57.6 vs 57.5 expected and slightly down from 58.8 last month. Production and new orders eased a bit to still lofty levels while employment rose to 54.5. Prices paid advanced again after a drop in December but supplier deliveries declined for a third month straight to the lowest since November 2020, suggesting further relief on supply chains. Jolt openings (10925k) topped consensus estimates and are hovering near the all-time highs. US yield moves were limited between -1.4 bps and +1.4 bps. The 2y yield shows signs of short-term topping after the recent aggressive repositioning towards five Fed policy rate hikes for 2022. The dollar traded on the back foot, allowing EUR/USD to recover further despite a poorly shaped euro. A constructive risk setting (stocks gained about +1%) may have weighed on the greenback as well. Either way, the pair closed at 1.1272. DXY eased to 96.38. Sterling recouped half of Monday’s technical losses against the euro. EUR/GBP grinded lower to finish at 0.834.

•          Down Under stays in the center of attention during Asian dealings. RBA governor Lowe during a press conference elaborated on the policy decision made yesterday. He repeated that the end of QE does not imply an immediate rate hike but said it’s plausible that the policy rate goes up “later this year”. The Aussie dollar gains marginally. In New Zealand, the unemployment rate hit the lowest on record (see below). News otherwise is limited. Stocks gain 1-2% with Japan outperforming. Core bonds and FX markets are an ocean of calm.

•          The US ADP job report today precedes the official reading on Friday. Consensus expects omicron to have dampened employment gains to an 184k increase after the whopping 807k in December. Our (and market’s) eye will go to the European inflation figure though. Consensus was already raised from 4% to 4.4% in recent days, limiting but not completely eliminating the scope for an upward surprise after a string of individual country releases earlier. The slower-than-expected easing of inflation heaps ever more pressure on the ECB. After the recent boost, European & German yields may first want to check the outcome of the central bank meeting tomorrow. We expect the euro to stay on the sidelines for the same reason. For sterling the tone of and hints by the BoE tomorrow will be crucial. The market bar is set quite high at 5 policy rate hikes.

News Headlines

•          Stats NZ published Q4 New Zealand labour market data this morning. The labour market continued to show tightness witnessed in Q3 with both unemployment (3.2%; lowest since start of the series in 1986) and underutilization (9.2%) remaining low. The participation rate declined from 71.2% to 71.1%. The number of employed people remained steady in Q4 (0.1% Q/Q), but the Y/Y reading remained elevated at 3.7% thanks to the previous three quarters. Wage inflation measured by the labour cost index was 2.6% in the year to the December 2021 quarter, while average ordinary time hourly earnings rose 3.8 percent. The private sector experienced stronger wage growth than the public sector in Q4. The kiwi dollar didn’t react to the data, but made a welcome rebound in yesterday’s positive risk climate. NZD/USD trades around 0.6635, up one big figure from last week’s sell-off low.
•          A survey by the British Retail Consortium showed that shop prices rose by 1.5% Y/Y in January (0.1% M/M), up from 0.8% Y/Y in December and the fastest pace since December 2012. Food prices increased by 0.3% M/M to be up 2.7% Y/Y (from 2.4%), reflecting poor harvests, labour shortages and rising global food prices. Non-food prices rose fell by 0.3% M/M, but were up 0.9% Y/Y (from -0.2%). Exceptionally high demand for furniture and flooring stood out.


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. Next target stands at EUR/GBP 0.8282 though the UK currency has already discounted quite some short-term interest rate support.

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.
The authors of this recommendation do not warrant the accuracy, completeness or value (commercial or otherwise) of any recommendation. Neither are the authors liable to those who receive these recommendations for the content of it or for any loss or damage arising (whether in tort (including negligence), breach of contract, breach of statutory duty or otherwise) from any actions or omissions of the authors in reliance on any recommendation, or for any claim whatsoever in respect of the content of, or information contained in, any recommendation. Any opinions expressed herein reflect the judgement at the time the investment recommendation was prepared and are subject to change without notice.
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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