Friday, 4 February 2022
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•          A hawkish hike and a hawkish hold. The Bank of England raised rates by 25 bps to 0.50%, initiated the natural roll off of the balance sheet and will actively start selling from the corporate bond portfolio. Four out of the nine MPC members voted for a 50 bps increase. Inflation is now expected to peak at more than 7% vs 5% previously. If the BoE would follow the market policy rate path (peak rate at 1.5-1.75% by mid-2023), prices would still increase by more than 2% in 2023 and only ease back to/below target in 2024. (Further) tightening policy is necessary to kill off inflation that’s eating away UK incomes/spending and is weighing on growth. UK yields rallied 9.8 to 11.5bps higher. The short end underperformed. Markets pulled forward the next policy milestone, expecting 1% policy rates already in May. This would mean the BoE starts actively selling government bonds. EUR/GBP briefly hit support at the 0.828 zone but then the ECB came and shocked. There were no changes in policy but there were in the tone. There is unanimous concern on inflation and their upwards risks. Lagarde finally admitted we’re in a different situation and said it needs to be reassessed based on the data. This will happen at the March meeting when inflation forecasts will most certainly be raised to north of 2%, allowing for a quicker end of net buying and a rate hike later this year. Euro area money markets raised their tightening bets and now anticipate more than 40 bps of rate increases. It jolted the front end of the European swap curve by 14.1-15.7 bps! The long end added 2.3 (30y) to 8.9 bps (10y). German yields rose in similar fashion. European yields pulled those in the US 4.2-6.3 bps higher across the curve. The euro shot up, ignoring the equity selloff in both Europe (-2%) and the US (almost -4%!). This was the trigger the common currency has been waiting for all this time. EUR/USD surged from 1.1304 to 1.144. EUR/GBP closed above 0.84 (from 0.8327). EUR/JPY: from 129.37 to 131.54. And the list goes on. Japanese bond markets this morning are inspired by the ECB (see below). Asian stocks are surprisingly resilient given moves in Europe and the US yesterday. The German bund continues to underperform USTs. The euro builds on yesterday’s momentum. EUR/USD is nearing a three-month high (1.1456). US payrolls are today’s headliner. Omicron may have weighed on employment in December. Consensus expects a rather meagre 125k job growth after the disappointing ADP job report earlier this week. Developments on European markets require at least as much attention though. We’re keeping a close eye at market positioning, both in European rates and the currency, now the dust has settled a bit. The picture in EUR/USD definitely turned for the better. First meaningful resistance in EUR/USD is located at 1.1526 but that’s a bridge too far for the time being. The recent surge in European yields may also dial back a bit going into the weekend.

News Headlines

•          All eyes are on Bank of Japan governor Kuroda after yesterday’s dramatic ECB press conference. He must be the last man standing when it comes to ultra-easy monetary policy. He testified before parliament this morning, stressing that Japanese inflation is low even excluding temporary factors. BoJ member Wakatabe yesterday also warned against premature tightening and even keeps easing options open. Whatever the BoJ says, Japanese interest rates started moving in the other direction. Japanese yields add up to 3 bps this morning with the belly of the curve underperforming the wings. The Japanese 5y yield briefly turned positive for the first time since 2016.

•          The food price index of the UN Food and Agricultural Organization rose 1.1% in January to 135.7, challenging peak levels of 2011. A monthly 4.2% rise in vegetable oils was an important driver, mainly due to supply side constrains. The FAO is concerned the impact of these constraints won’t ease quickly. Dairy prices (+ 2.4% m/m) also increased for the fifth consecutive month due to reduced availability exports from Western Europe and expected lower production from Oceania. The cereal index increased marginally (0.1%), as did the meat index. Sugar was the only subindex to decease (3.1% M/M). Persistent high/rising food prices suggest further upside risks for inflation, especially in developing countries.


Long term EU bond yields surged after the ECB hinted it may stop net bond buying sooner than previously expected (Q4 2022) amid stubbornly high and even accelerating inflation. The move was driven by higher real rates. The break into positive territory has been confirmed. Next stop: a leap beyond 0.15%/0.19% (61.8% 2018-2020 retracement/2018 interim low), followed by 0.40%.

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 ECB changed the tone dramatically. Views on temporary inflation have changed. This will be formally reflected in the March projections. Net bond buying is poised to end sooner, at the latest in Q3, allowing for a first rate hike later this year. EUR/USD left the lows behind with backing from the central bank. Previous resistance around 1.14 turned into support with the next reference at 1.1524.

The BoE hiked to 0.5% in February with the biggest possible minority even voting for a 50 bps increase. Further tightening is in the pipeline. With quite some BoE rate hikes already discounted and the ECB having started the U-turn, the odds have turned in favour of EUR/GBP. The pair tested the 0.828 support area but rebounded quickly. The 0.85 big figure is both technically and symbolically important.

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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