Tuesday, 3 Mai 2022
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Markets

•          Markets yesterday had to cope with multiple, divergent pieces of news both on inflation and growth. Most data still suggested that the former is becoming an ever bigger hurdle for the second. Chinese data are flagging that strict corona measures cause the second largest economy to be a drag rather an a motor for world growth as it will add both to supply chain disruptions annex higher prices and hamper demand at the same time. EC confidence declined faster than expected from 106.7 to 105. The supply/industry related subseries were not too bad, but the European consumer clearly fears the war in Ukraine to spark a protracted cost of living crisis (-22.0 from -16.9). US eco data of late were resilient but the April manufacturing ISM (55.4 from 57.1 vs 57.6 expected) shows that prices/supply issues are still abundant, but demand shows tentative signs of easing, too. Initially, all this led to outright risk-off, especially on European indices. The EuroStoxx50 lost 1.85%. US indices after a hesitant start finally rebounded (Dow +0.26%, Nasdaq + 1.63%). US yields didn’t change course despite uncertainty on growth, rising between 4.7/4.9 bps (5-y/10y) and 1.7 bps (2-y). The decomposition of the move in the 10-y yields was striking. The US 10-y real yield jumped more than 15 bps to 0.14%, partially compensated by a decline in inflation expectations (-11 bps). Two days before the Fed decision, market confidence is high that Fed rate hikes and QT will do the job. The German yield curve also steepened with the 2-y yield easing 1.9 bps and the 30-y rising 4.8 bps. There was a slight easing in EMU inflation expectations, too. However, 10-y EMU inflation swaps now moved above their US counterparts (3.08% vs 3.0%), illustrating the loss of confidence in the ECB’s mandate to anchor inflation at its 2.0% target over the policy horizon, or even far beyond. The DXY USD index reversed Friday’s correction (close 103.74) but didn’t break last week’s top. EUR/USD still struggles to avoid a break below 1.05. Sterling initially outperformed the euro, but a late session setback even caused EUR/GBP to close north of 0.84.
•          This morning Japanese and main Chinese markets are closed. Later today US JOLTS job openings, German and EMU labour market data are interesting but no market mover. Investors will mainly count down to tomorrow’s Fed decision, unless some unexpected news from the Ukraine conflict were to interfere. We keep a close eye whether the US real yield will extend its journey further into positive territory. In more constructive risk sentiment, this shouldn’t immediately translate into a further acceleration of the dollar. That said, the US currency clearly remains in pole position. At the same time, it will be difficult for EUR/USD to avoid a return to the 1.0341 correction low, unless the ECB decisively steps up its anti-inflation commitment.

News Headlines

•          The Reserve Bank of Australia completed a Riksbank-style sudden policy U-turn by lifting its policy rate this morning from 0.1% to 0.35%. More rate hikes are coming to ensure a return of inflation towards target. The RBA also decided to no longer reinvest proceeds of maturing government bonds. The Australian economy has proven to be resilient and inflation has picked up more quickly, and to a higher level, than was expected. There is also evidence that wages growth is picking up, a key factor for the RBA to start a tightening cycle. Australian GDP growth is forecast to remain strong at 4.25% this year and 2% next. A further rise in inflation is expected short term (6% headline; 4% core), before moderating towards 3% (upper tolerance band) by mid-2024. AUD/USD (0.71) bounces away from the danger/support zone in the low 0.70-area. The AUD swaps curve bear flattens with yields rising by 2.7 bps (30-yr) to 13.5 bps (2-yr). Australian markets discount another 250 cumulative bps of rate hikes this year.

•          The US manufacturing ISM disappointed yesterday, dropping from 57.1 to 55.4 while consensus expected a small improvement to 57.6. The headline reading was the weakest since September 2020. Details showed broad-based weakness, also on the demand side. Actual production fell from 54.5 to 53.6 with new orders and export orders falling to 53.5 and 52.7 respectively. Employment barely held above the neutral 50-level. Supply-side issues remain at play with supplier deliveries rising from 65.4 to 67.2 and business running down inventories. Price pressure was slightly lower than in March, but is still sky-high at 84.6.


Graphs

European yields recovered from the early stages of the Russian-Ukrainian war as the expected growth slowdown didn’t deter the ECB from formally stepping up the normalization plans. Net asset purchases will end in June, with a first rate hike likely in July. Runaway inflation expectations suggest the ECB’s response will still be too little, too late. Next resistance stands at 1.06% (2015 top).

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. The US yield curve extended its bear flattening trend. Quantitative tightening will start soon (>=$95bn/month). The US 10-y real yield returned into positive territory. The psychologic 3% resistance holds for now.

EUR/USD remains stuck in a downward trend channel. Losing the previous YTD low at 1.0806 and the 2020 bottom at 1.0636, suggests a return to the 2017 low at 1.0341. ECB needs to step up its inflation response to give the single currency much needed backing. Russian war in Ukraine plays in the euro’s disadvantage as well.

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 doubt starting to filter through in markets. EUR/GBP bounced off the 0.82/0.83 support zone. The YTD high at 0.8512 is first meaningful resistance.

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.
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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