Thursday, 4 August 2022
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•          Minneapolis Fed and SF president Kashkari and Daly yesterday put it very clearly: rate cuts in 2023 are very unlikely and markets are ahead of themselves pricing them in. These are just two more quotes from a concerted hawkish intervention by the Fed. Fed’s Barkin sought to ease concerns for a recession, citing the strong labour market. His words were also backed by the strong US services ISM, which increased from 55.3 to 56.7, defying expectations for a drop to 53.5. Business activity and new orders surged. Prices paid fell to the lowest since February 21 while backlogs (viewed by some as a proxy for demand-supply imbalances) eased too. US yields shot up before retracing again. The shorter tenors did retain some of the gains though. The 2y finished 1.6 bps higher compared to losses between 4.4 and 6.2 bps for the 10y-30y segment. Bunds underperformed. The curve bear flattened, seeing changes of 7.8 bps at the front and 4.3 bps further out. The yen on FX markets lagged G10 peers, allowing USD/JPY to extend a comeback to 133.86. The dollar itself traded directionless. EUR/USD ended flat sub 1.02 while the DXY index eked out a small gain (thanks to the weak yen) to 106.50. The intraday core bond yield dynamics supported stocks. European shares rose 1.3%, gains on WS were even double that (2.6% for Nasdaq). Oil prices briefly jumped to $102/b (Brent) following OPEC’s symbolic output boost of 100k barrels/day but soon slipped back below the triple digits.
•          Asian-Pacific trading this morning is muted with little news flow to guide markets through. The kiwi and Aussie dollar secure the first and second place, amongst others helped by a massive Australian trade surplus (see below). Equities trade mostly in the green. Taiwan underperforms (-0.6%) amid lingering geopolitical tensions. Core bonds shift lower.
•          The Bank of England is in focus today. At the previous meeting, the statement read that if inflation looks more persistent, the central bank may have to act “more forcefully”. Price increases meanwhile rose to 9.4% in June. With gas prices having surged again, which some say could raise the household energy cap in October by a stunning 70%, the BoE’s estimate of inflation peaking at 11%+ is outdated once again. In order to prevent high inflation expectations getting entrenched (triggering second-round effects), we expect the BoE to jack up rates by 50 bps today to 1.75%. This is, however, discounted by markets, not least sterling, and not doing so would thus come as a major disappointment. The accompanying rhetoric will determine any follow-up gains for the Queen’s money. From a technical point of view, EUR/GBP, currently trading in the 0.836 area, has some room left to deepen losses within the downward sloping trend channel towards the 0.83 area. We assume this to be solid support. The policy meeting may even set the tone for EU and US markets in absence of other economic data. However, with the payrolls report looming (Friday), we don’t expect a material reaction. We’re keen though to see if the bottoming out process in core bond yields continues.

News Headlines

•          Australia’s trade surplus pushed to another record high amid searing prices of export products ranging from grains to metals and gold. Exports rose 5% while imports increased 1% amid Australians travelling overseas, bringing the June figure to A$17.7bn. Trade has been a key reason for the Australian economy to hold up pretty well and will provide another big boost to the country’s second-quarter GDP. Down Under is stacking monthly surpluses for 4.5 years in a row now.

•          Brazil’s central bank (BCB) raised rates by an expected 50 bps to 13.75% while keeping the door open for a smaller increment in September. The central bank shifted its focus to the outlook for inflation more than a year ahead. It does so because of recent tax changes and a $7.6bn social aid package that have opposing effects on inflation, thus making near-term price behaviour estimates even more difficult. But it also indicates the BCB is keen on ending the tightening cycle. Inflation, standing at 11.39% in mid-July, is seen at 4.6% next year and 3.5% in 2024Q1. The BCB targets 3.25% in 2023 and 3% in 2024.


The ECB ended net asset purchases and lifted rates with a 50 bps inaugural hike. More tightening is underway but the ECB refrained from guiding markets on the size of future rate hikes. Economic indicators however show growth is stalling or even contracting. Markets doubt whether tightening may last in 2023. Germany’s 10-yr yield extended a correction lower. After breaking important support at 1.12% and 1.03%, 0.73% is the next reference.

The Fed hiked to neutral by a back-to-back 75 bps in July. The size of future moves depend on the incoming data. QT will hit max speed by September. But markets begin questioning the Fed’s hawkish intentions following a string of weak data. Yields are under pressure. The 10y dropped below the lower bound (2.70% area) of the sideways trading range. A test of next support at 2.55% was rejected.

The euro zone’s (energy) crisis is being accompanied by an Italian political crisis. Growing recession fears hammered EUR/USD below the 2017 low of 1.0341. Parity was tested before a technical (USD-driven) correction higher kicked in. A tactical dollar pause is at hand but the euro remains strategically under pressure. It takes a return above EUR/USD 1.035 to call off the immediate downside alert.

A combination of euro weakness, PM Johnson’s exit clearing some political fog, a correction in the oil price and the BoE reiterating, potentially stepping up its anti-inflation commitment, triggered a sterling short squeeze early July. EUR/GBP fell below the established uptrend before finding support around 0.84. A balance of weakness could keep the pair in a sideways 0.84/0.86 trading range. Euro weakness is a risk.

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). Read the full disclaimer.

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