Wednesday, 5 October 2022
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•          Monday’s strong corrective rally on core bond markets initially continued as the RBA slowed down its tightening pace from 50 bps to 25 bps as downside economic risks grab more attention. It polished global central bank expectations though this morning’s RNBZ verdict (see below) shows that this probably is premature. The (US) eco calendar seemed to be irrelevant in between ISM releases, but August JOLTS job openings drew attention. Job vacancies dropped at the second sharpest pace in two decades (1.12mn), with only the height of the pandemic lockdowns (April 2020) recording a bigger plunge. It’s a first sign of a potential cooling of a red-hot US labour market. Today’s ADP employment report and Friday’s payrolls will be looked at with JOLTS in the back of investors’ minds. This week’s disappointing US eco numbers don’t hold back the hawkish Fed rhetoric for the moment with new Fed governor Jefferson stressing that reducing inflation is the number one priority and SF Fed Daly vowing for continued action in the inflation battle. The intraday rally in core bonds was at least partially stopped by rallying oil prices ($89/b to $92/b) on rumours that OPEC+ will consider a reduction its production limit of 2m barrels/day. Daily changes on the US yield curve ranged between -2 bps (2-yr) and +1.6 bps (30-yr). The German yield curve bull steepened with yields falling 1.5 bps (30-yr) to 6.6 bps (4-yr). The corrective trend reversal at the beginning of this week remained visible on stock and on FX markets. The big difference is that Monday’s action centered around bond moves, while yesterday’s outsized action took place in equity and the dollar. Main European indices rallied by around 4% with the big three US indices closing around 3% higher. The dollar extended its correction lower with the trade-weighted index (DXY) losing almost two big figures to 110 in a steady move south. EUR/USD rallied from an open at 0.9826 to nearly parity. The topside of the long-standing downward trend channel kicks in at around 1.0050 and is important resistance. EUR/GBP finally found its footing following the UK government/BoE-induced volatility since mid-last month. The pair currently trades around the previous YTD high at 0.8721. From this point onwards, sterling might be up for a more gently weakening path again. US ADP employment and services ISM feature today’s agenda. We don’t think that corrective market action is over yet with markets again in some kind of ‘bad news is good news’ modus as a worsening economic situation could tilt central bank tightening plans.

News Headlines

•          The Reserve Bank of New Zealand hiked by 50 bps this morning. The policy rate now stands at 3.5%. In contrast with the RBA yesterday, which raised rates by an amount smaller than expected (25 bps), the RBNZ even considered going full force with a 75 bps move. More tightening is underway, the central bank signaled, citing too high inflation (7.3% in Q2), resilient household balance sheets and consumption and a very tight labour market. The kiwi dollar has weakened in recent months. If sustained, it poses further upside risks to inflation, the RBNZ added. Despite the RBNZ’s clear message, government bond yields tumble 17-19 bps across the curve. It is testament of (broader) markets consolidating. New Zealand money markets currently price in a terminal rate of 4.5% compared to the 4% penciled in by the RBNZ in its August forecasts. The currency strengthened following the decision to NZD/USD 0.58 but pared gains soon enough.
•          South Korean headline inflation slightly eased from 5.7% y/y to 5.6% in September thanks to declining energy prices. Core inflation on the other hand ticked higher to 4.5%, highlighting the strength of underlying price pressures. The Bank of Korea said CPI growth is likely to hold in a 5-6% range for a considerable time. It raised the policy rate since August last year to 2.5%. Unlike many others and with the July meeting as the sole exception, it stuck to a gradual 25 bps hiking pace. Today’s inflation print combined with the weakening won raises pressure on the BoK to pick up the tempo again Friday next week. USD/KRW gapped lower this morning to trade at 1418.8. That’s still near the strongest (weakest for the won) level since 2009.


The ECB ended net asset purchases and lifted rates by a combined 125 bps at the July and September meetings. More tightening is underway but the ECB refrained from guiding markets on the size of future hikes. Germany’s 10-yr yield rose to its highest level since 2011 (2.35%) with real rates driving the push higher. Next support in the current correction lower stands at 1.71% (38% retracement on August/September move).

The Fed policy rate entered restrictive territory, but the central bank’s job isn’t done yet. The policy rate is expected to peak above 4.5% early next year and remain above a neutral 2.5% over the policy horizon. QT hits max speed. The 10y reached its highest level since 2008 (4.01%). Support stands at 3.5%/3.44%

EUR/USD is in a strong downward trend channel since February. The dollar remains the main beneficiary of rising US (real) yields in a persistent risk-off context. Geopolitical and recessionary risks are bigger for Europe, holding down the single currency as well even as the ECB finally embraced on a tightening cycle. Resistance stands at EUR/USD 0.9950/1.0050.

The UK government had to backtrack on part of its lavish fiscal spending plans which sent sterling initially tumbling towards the EUR/GBP 0.90+ area. Yawning twin deficits and rising risk premia will continue to weigh on the UK currency even as markets think that the BoE will have to counter fiscal support with additional monetary tightening.

Calendar & Table

Note: All times and dates are CET. More reports are available at 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). Read the full disclaimer.

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