Tuesday, 7 June 2022
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•          Last week’s sell-off in core bond markets simply continued at the start of the new one. The main move occurred around the start of US dealings without firm trigger. US Treasuries underperformed German Bunds. The Germany yield curve bear steepened with yields rising by 3 bps (2-yr) to 5.3 bps (30-yr). The breakdown of the 10-yr yield showed that both real yields and inflation expectations contributed to the move. The German 10-yr yield pushed above 1.3% for the first time since June 2014, leaving the key 1.13%-1.23% resistance zone firmly behind. The next long term technical references stand at 1.9% (50% retracement on 2008-2020 decline to 2.09% (2013 top). The US yield curve bear steepened as well with yields adding 7.4 bps (2-yr) to 12 bps (20-yr) in a daily perspective. The US 10-yr yield reconquered the psychological 3% barrier after a brief spell north of it early May. The key technical reference is the 2018 top at 3.26%. US stock markets attempted to copy the positive mood in Europe (+1-1.5%), but their efforts were blocked by the intensity of the bond sell-off. Main US indices eventually closed flat (Dow) to 0.4% higher (Nasdaq). The dollar was better bid, arriving this morning at first minor resistance at 102.73 (DXY). Taking out that level suggests an end to the technical correction since mid-May. Similar reference in EUR/USD is 1.0627/42. Going into this week’s pivotal ECB meeting, we believe that the single currency could offer some counterweight still, especially given the empty US eco calendar until Friday’s CPI inflation and Michigan consumer confidence. The Japanese yen is the biggest victim in the current climate. USD/JPY sets a new 20-yr high in the high 132-area. The 2002 top at 135.04 serves as next resistance. BoJ governor Kuroda isn’t helping JPY much by stressing the outlier dovish monetary policy position. Powerful easing with yield curve control as a pillar remains the motto. The BoJ watches the impact of the weak yen, but the currency policy is up to the finance ministry. FM Suzuki later reiterated his warning that they are monitoring the FX rate and their economic impact with a sense of urgency. These soft verbal interventions can’t counter JPY weakness. UK PM Johnson lives to fight another day after narrowly surviving a Tory-triggered no confidence vote in parliament. The pyrrhic victory (211-148) shows a bigger than feared internal rebellion which hurts Johnson’s credibility even further. Lack of internal successor and fear for election defeat suggest that Johnson could nevertheless stick somewhat longer in office. After the vote, he promised to present a plan for the economy together with Chancellor Sunak next week. The plan should focus on the supply-side reform and tax cuts. Sterling is a tad softer this morning at EUR/GBP 0.8570. First minor resistance lingers around at 0.86.

News Headlines

•          The Reserve Bank of Australia hiked by 50 bps, bringing the cash rate to 0.85%. Markets expected the RBA to continue with a 25 bps pace. The move follows high and increasing inflation on the back of global as well as domestic factors. The latter includes capacity constraints in some sectors and a tight labour market. The economy is resilient with an upswing in business investment underway and terms of trade at a record high. Consumer spending is being supported by growing wages but the impact of inflation on household’ budgets  is a source of uncertainty. Housing prices have declined amid rising interest rates and may affect household wealth/spending at some point. For now, the central bank expects policy rates to rise further with the size and timing guided by the incoming data and the outlook for inflation and the labour market. Australian swap yields surge more than 13 bps at the front-end. The Aussie dollar tried to settle above 0.72 but ran into resistance soon. AUD/USD currently changes hands around 0.718.
•          At its policy meeting this Thursday, the ECB will strengthen its commitment on preventing fragmentation when it starts raising policy rates for the first time in more than a decade, the Financial Times reported. Citing people involved in the discussions, a majority in the council is expected to support a proposal for a new bond-buying programme if needed to counter borrowing costs for the likes of Italy should they spiral out of control. Several policy makers want Thursday’s statement to formally include the possibility of such a mechanism to be created.


The ECB will end net asset purchases early July. A first rate hike will follow later that month. Speculation has caused real yields to bottom out, compensating for inflation expectations having corrected lower from record highs. The worrying growth outlook has triggered a first meaningful correction since the start of the Russian invasion, but still-accelerating inflation shows the pressing need to act and hurled rates back to new cycle highs.

The Fed started its tightening cycle and published an aggressive blueprint for the remainder of the year. 50 bps rate hikes at the next meetings can be taken for granted. Quantitative tightening has started and will hit max speed by September. But the recent yield surge this caused, has eased recently. Yields may be entering a period of consolidation between 2.72% and 3.20%.

EUR/USD tested the 2017 low at 1.0341 which survived. The pair regained 1.0636 mostly on dollar fatigue. It does serve as a first sign of easing downside momentum. The next reference stands at 1.0806 with intermediate resistance at 1.0758.

The developing cost-of-living crisis seems to hit the UK economy first and the hardest. Weak economic data toughen the Bank of England’s dilemma in battling inflation with doubts filtering through in markets. Open division within the BoE and the limited room for further tightening pushed EUR/GBP towards 0.86. A sustained break would be a bad omen for sterling.

Calendar & Table

Note: All times and dates are CET. More reports are available at KBCEconomics.be 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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