Monday, 7 February 2022
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•          Ahead of Friday’s US payrolls, at least part of the market cautioned for a soft interrupt in the labour market recovery as omicron potentially dampened contact sensitive economic activity. However, contrary to the ADP report, the pause in the job recovery wasn’t visible in the official labour market statistics. All sub-indicators point to a further US labour market tightening. January payrolls growth printed at a very strong 467 000 with an even more impressive 709 000 upward revision. Wage growth also accelerated 0.7% M/M and 5.7% Y/Y AHE. The unemployment rate rose from 3.9% to 4.0% but this was due to a higher participation rate (62.2 from 61.9%) that policy makers were hoping for. Investors had every reason to believe Fed Powell’s warning that this tightening cycle will be different from previous ones. An initial stabilization/cautious decline in US yield was swapped for an astonishing bear flattening. The 2-y jumped another 11.4 bp with the 30-y rising ‘only’ 5.8 bps. The rise was entirely due to a higher real yield. The 2-y yield reached 1.32. The US 10-y also touched a new cycle top (1.93%). US interest rates rise post-payrolls outpaced EMU. Even so, after Thursday’s inflation U-turn of ECB’s Lagarde, any dovish positioning left in the euro market was also further squeezed out with German yields rising between 9.1 bps (5-y) and 2.3 bps (30-y). Markets now discount that ECB policy rates might already leave negative territory by the end of this year. The prospect of tightening financial conditions initially weighed on the equity markets with the EuroStoxx50 losing 1.31% at the close. However, US indices later found their composure finishing unchanged (Dow) to even with a gain of 1.58 % (Nasdaq). Europe finally being perceived as joining a more anti-inflationary course limited post-payrolls gains of the dollar. EUR/USD after testing the 1.1483 January top before the payrolls finished marginally stronger at 1.1449. DXY closed at 95.48 (from 95.30). Underlying euro strength further propelled EUR/GBP to close at 0.8461.

•          This morning, Asian equities are mostly trading with modest losses. Mainly China markets are the exception to the rule after the reopen from the Lunar New year holidays. The PBOC fixed the yuan at a relatively weak level. Even so, yuan is holding resilient near 6.36. The dollar this morning is gaining a few ticks, both trade-weighted as against the euro (EUR/USD 1.143). Today, the eco calendar is thin. ECB’s Lagarde gives an introductory  statement at the hearing before the EU parliament. ECB’s Knot in press comments this weekend indicated that the ECB could raise interest rates as soon as Q4 as he expects EMU inflation above 4.0% for most of 2022. Regarding this week’s data, the US January CPI release on Thursday takes center stage (headline expected at 7.30%, core at 5.9%). We also keep a close eye at comments from the ECB and the Fed. Are policy makers (still) happy with recent sharp market repricing or will they advocate some caution? The Ukraine-Russia tensions remain an important source of uncertainty, with oil rising further (brent $ 93 b/p). For now, there is no reason to row against the hawkish global repricing, but the pace of the move might al least take a breather. This week’s US inflation might call some kind of a peak in the ‘inflation hype’. On the currency markets, Lagarde’s U-turn finally restores some balance between the euro and the dollar. A break of EUR/USD beyond 1.1483 would improve the technical picture. Maybe some further clarification on the expected ECB path is needed for a protracted further euro comeback.

News Headlines

•          The EU is forging contingency plans should Russian/Ukrainian tensions erupt into a military conflict. Measures include shielding consumers and businesses from surging gas prices, a possible migratory crisis and cyber security threats. The Commission is a.o. examining how it could intervene temporarily to weaken the link between high gas prices and the cost of electricity. It is also exploring to secure more and diversified flows of LNG from big producing countries, including the US, Qatar, Azerbaijan and Nigeria.

•          Australian PM Morrison announced today the reopening of the country’s borders to international travelers. Since March 2020 borders were closed almost entirely for non-citizens to stem the spread of Covid, hurting the tourism sector which contributed about 3% to the economy prior to the pandemic. Morrison said that tourists and visa holders are allowed back in the country from February 21 provided they have been vaccinated twice..


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. The German 10-y yield also cleared the 0.15% resistance (61.8% 2018-2020 retracement), 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 1.1483 and 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.
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