• We had to wait for some US figures to spice up yesterday’s trading session a little bit. ISM manufacturing confidence unexpectedly accelerated from 55.4 to 56.1, mainly as new orders kept flowing in strongly (55.1). Supplier deliveries eased only marginally to a still-lofty 65.7 and employment fell (49.6), both highlighting ongoing supply disruptions, material shortages and personnel-related capacity constraints. Near-record JOLTS with, give or take, two openings per unemployed American served as another point in case. The strong data caused the US yield curve to bear flatten with changes from 1.2 bps (30y) to 9.7 bps (3y, 5y). Investors ramped up bets for Fed tightening with markets just a few bps shy of pricing in another 50 bps hike in September after June and July. European yields rose in lockstep, adding between 4.9 and 7.3 bps across the curve. The German 10y (+6.5 bps) yield closed at a new cycle high at 1.187%, surpassing 1.127% resistance from the 2012/2013 interim lows. UST underperformance and lacklustre stocks (about -0.7%) swung the dollar higher. The trade-weighted index jumped beyond 102(.49), EUR/USD retreated from 1.073 to 1.065. USD/JPY tested the 130 big figure. Sterling was unable to benefit from a sharp(er) rise in Gilt yields ahead of a 4-day weekend. EUR/GBP instead eked out a gain beyond 0.8512 resistance to the 0.853.
• Stocks in the Asian-Pacific region fall with Hong Kong underperforming (-1.8%) as it reinstated some Covid Zero measures by quarantining patients even with mild symptoms. Rating agency S&P reaffirmed China’s rating at A+ with a stable outlook. The yuan declines nonetheless with USD/CNY nearing 6.70. Most other dollar pairs trade stable. EUR/USD hovers sideways around 1.066. Core bonds trade listless. Oil prices ease (Brent -1.7%) following reports that Saudi Arabia is ready to raise production should Russian output decline materially.
• Today serves as a transition day before US payrolls are released tomorrow. The unofficial ADP jobs report (300k exp.) and jobless claims may give some taste but probably won’t be defining for trading. OPEC+ holding its monthly meeting is worth watching too following the latest reports (see above and yesterday). There are some ECB speeches scheduled but the central bank’s quiet period starts today. The Fed’s kicks off this Saturday. On markets, the core bond yield correction lower was showing signs of bottoming out over the past few days from a technical perspective. Inflation data in the eurozone and yesterday’s strong numbers in the US added a fundamental layer to that. We see no reason for that to change for the time being. It may bring equities back in a tougher spot, making it difficult for EUR/USD to take out first resistance around 1.0758 on a sustained basis. UK markets are closed today and tomorrow.
• The Bank of Canada yesterday as expected raised its policy rate by 50 bps to 1.5%. It also continues its quantitative tightening. CPI in April reached a higher-than-expected 6.8% and the BOC expects it to move even higher in the near term. Inflation is broadening with measures of underlying inflations rising and 70% of the CPI categories printing above 3%. The global economy will probably slow down but growth in Canada in Q1 was solid (3.1%) and the BOC expects this to continue in Q2 on consumer spending and exports. Job vacancies are elevated and wage growth is rising across sectors. With the economy remaining in excess demand and inflation seen moving further above target, rates will need to rise further and the governing council is prepared to act more forcefully if needed. USD/CAD traded quite volatile after the policy announcement. The possibility of a faster and more protracted rate hike cycle is CAD-supportive. However, at the time of the BOC announcement, the USD dollar also jumped sharply higher on a strong US ISM. At the end of the day, USD/CAD even traded marginally stronger at 1.2657.
• Yesterday, Croatia took a decisive hurdle to become the 20th EU Member State to use the euro. The European Commission yesterday said that the country can be allowed the join the EMU as it was assessed that the country has reached the convergence criteria in a sufficient way. EU leaders are expected to approve next month that the country can join the eurozone at the start of next year.
The ECB will end net asset purchases early July. A first rate hike will follow later that month. Speculation has caused real yields to bottom out, compensating for inflation expectations having corrected lower from record highs. The worrying growth outlook has triggered a first meaningful correction since the start of the Russian invasion. But still-accelerating inflation shows the need to act and hurled rates back to new cycle highs.
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 between 2.72% and 3.20%.
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 first 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.
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). Read the full disclaimer.
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