Monday, 4 April 2022
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•          Record-high EMU inflation (7.5% Y/Y in March) and stellar US payrolls (431k; 3.6% unemployment rate) hijacked headlines last Friday. They kept the US bear flattening trend in place even if oil prices remained near recent lows after the US SPR release announcement. A lower, but still elevated, US manufacturing ISM (57.1 from 58.6) had no impact either. It was exemplary for the situation we’re in: a red-hot labour market, inflation spiraling out of control and a grimmer eco outlook. Daily changes on the US yield curve ranged between -1.5 bps (30-yr) and +12.3 bps (2-yr). The US 2-yr yield is about to take out the 2.5% mark. SF Fed Daly confirmed in an FT interview that the case for a 50 bps rate hike in May has grown, barring any negative surprise between now and that meeting. She stressed awareness to get (at least) neutral policy levels this year. Heavyweight NY Fed governor Williams also joined that chorus. German yield gains were limited to 1 bp across the curve. The CPI-print was well anticipated by national inflation releases earlier on the week. EUR/USD couldn’t recover from the end-of-quarter setback and rather stabilized near 1.1050. The same goes for EUR/GBP around 0.8420. Stock markets ended the week on a slightly positive note, gaining up to 0.5% in both Europe and the US.
•          Asian stock markets are mixed this morning with Hong Kong outperforming and mainland China closed. The Aussie dollar regains the 0.75-handle after monthly inflation numbers (4% Y/Y) which raise the stakes of a hawkish swing at tomorrow’s RBA meeting The EU contemplates new sanctions against Russia because of war crimes in Ukraine. It could set the tone for trading in absence of important eco data today. Speeches by Bank of England governors Bailey and Cunliffe are wildcards. The UK central bank is very concerned about UK household’s disposable income and warned before to take a more cautious (tightening) approach going forward. The jury is still out as UK inflation again got ahead of the BoE’s inflation forecasts. Risks are nevertheless tilted towards outperforming UK gilts and renewed weakness in GBP. Central bank comments remain wildcards for trading throughout the week. The eco/event calendar is rather thin, apart from tomorrow’s US non-manufacturing ISM and Minutes of the previous ECB and Fed meetings. The latter will be an interesting read given internal divide on the pace of normalization processes. Developments since suggest that the more hawkish views could turn rapidly into reality at coming meetings. That’s also what (rate) markets continue to discount.

News Headlines

•          Hungary’s Orban and his Fidesz party scored a landslide victory in Sunday’s parliamentary elections, securing a fourth consecutive term as prime minister. The party maintained its two-thirds majority, defying polls that had predicted a much tighter race after opposition parties united themselves in an attempt to oust Orban. With Orban again at the helmet, sharp U-turns in Hungary’s policies, from fiscal to political (eg. rule of law dispute with EU), are unlikely. The Hungarian forint is trading stoic in low-volume trading this morning around EUR/HUF 367.54. Front-end Hungarian swap yields rise 12.5 bps (2y).
•          Germany’s defence minister Lambrecht on Sunday said the EU must discuss a Russian gas embargo. Germany up until now always resisted calls for a Russian energy import ban, arguing it and many other European countries are too dependent on it and cannot wean itself off it entirely straight away. Economy minister Habeck also on Sunday repeated that stance. But pressure is growing on and within the government to take more radical steps after accusations of Russian forces having committed atrocities near Kyiv. German Chancellor Scholz later said that Western allies would agree to further sanctions on Russia in the coming days.


European yields recovered from the setback by the Russian-Ukrainian war. It will slow down growth but didn’t deter the ECB from formally stepping up the normalization plans. QE is to end in Q3 with a rate hike in the next quarter. Real yields may further bottom out while inflation expectations will probably remain elevated. Resistance at 0.58% is under pressure. A sustained break higher brings the 0.80% 2018 high on the radar.

The Fed started its tightening cycle and published an aggressive blueprint for the remainder of the year. A 50 bps rate hike May is likely. The US yield curve extended its bear flattening trend. Plans to shrink the balance sheet will be published in May. Risks for a short-term correction rise as the commodity surge has eased. Medium term, the sell-off on core bond markets isn’t over.

The ECB sticking to – accelerating even – the normalization schedule is a (latent) positive for the common currency. After first protecting EUR/USD’s downside, it now lifts the pair near resistance at 1.1121. A break calls of the immediate downside technical alert. A return above 1.12 would make the technical picture more neutral.

EUR/GBP took out the first resistances between 0.82 and 0.83. The March ECB and BoE meetings restored some kind of monetary policy balance. The BoE even turned more dovish, but markets question this turn. EUR/GBP is showing signs of bottoming out nevertheless as (near-term) rate support lifts the euro’s spirits.

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.
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