Friday, 8 April 2022
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Markets

•          Minutes of the March ECB meeting kickstarted the countdown to next week’s ECB meeting. In line with FOMC Minutes, they surprised markets in a hawkish manner. The key takeaway was some ECB members already argued in favour of a firm end date (in Summer) for asset purchases. Eventually the ECB decided to accelerate the tapering of its asset purchases to €40bn in April, €30bn in May and €20bn in June. Ceteris paribus, they will end in Q3. We believe that the hawkish elements in the March minutes will turn into reality at next week’s meeting given that the March inflation numbers (7.5% Y/Y) already pale the March ECB staff projections. By labelling June the firm end date for asset purchases, the ECB creates a window of opportunity to stat hiking policy rates faster than expected. Copying the Fed’s playbook suggests a potential first rate hike in the month when net asset purchases end (ie June). However, the ECB’s updated forward guidance (first hike some time after net asset purchases end) suggests that the earliest lift-off date is probably July. European bonds underperformed US Treasuries following the Minutes in a bear flattening move. German yields closed 2.1 bps (30-yr) to 3.7 bps (3-yr) higher. Intraday yield rises had been bigger. Yields started retreating around the start of the US trading session as oil prices slipped away. Brent crude dipped below $100/b for the first time since mid-March after the International Energy Agency announced that they would bump global supply by 240 million barrels. The US yield curve continued its pre- and post-FOMC Minutes steepening trend on the Fed’s stealth quantitative tightening plans. Daily changes on the US yield curve ranged between -1.1 bp (2-yr) and +5.9 bps (10-yr). We retain comments from St. Louis Fed Bullard who argued in favour of lifting the policy rate to 3-3.25% by the end of this year. US weekly jobless claims dropped to 166k, their lowest level since 1968. The euro attempted to regain the 1.09 big figure in the wake of ECB Minutes, but the single currency couldn’t hold on to this gain. Return action eventually pulled the pair lower to close at 1.0879. The trade-weighted dollar extended its gains and has the 100 big figure in sight. Today’s eco calendar is completely empty in the US and EMU. It gives way for risk sentiment to direct intraday gyrations. In general, we expect ruling market trends to continue: core bonds and stock markets are in dire straits just like the euro unless the ECB provides some additional verbal backing at next week’s policy meeting.

News Headlines

•          Canada presented a much more conservative 2022 budget than expected. The net costs of 2022 budget measures (new spending minus new revenue from taxes) will be over C$31bn whereas some were anticipating a number closer to C$100bn. Finance minister Freeland chose not to deliver on some election promises to keep spending in check while banking on additional levies on financial institutions, the elimination of loopholes and tax avoidance strategies and a review of overall existing spending. The new plan sees Canada’s finances nearly in balance within five years with cumulative deficits through 2027 estimated C$50bn lower compared to the December update. The budget gap for this fiscal year is projected at C$52.8bn vs almost C$60bn in December. Total bond issuance for this year is seen at C$212bn, down from C$255 in the previous fiscal year.
 
•          France is headed for the first round of the presidential election on Sunday. A recent Ipsos poll (Apr 5 -7) showed Macron’s lead over far-right candidate Le Pen narrowed to just 3.5 ppts, continuing a trend that has been visible for some weeks now. According to the Ipsos poll, Macron would have 26.5% (-0.5 ppts) of the votes on Sunday while Le Pen would score 23% (+1 ppt). Far-left candidate Melenchon may come in third with 16.5%. Some analysts have attributed the rise of Le Pen in the polls to the recent euro weakness – even though abandoning the euro is no longer in Le Pen’s programme – and OAT underperformance.
 

Graphs

European yields recovered from the early stages of the Russian-Ukrainian war as the expected growth slowdown 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. First meaningful correction in over a month as the threat of new sanctions makes the ECB’s balancing act even tougher.

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. 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 next triggered a test of first resistance at 1.1121. A sustained break higher didn’t occur with the pair now at risk of falling out a closing triangle pattern as stakes in the Russian war are raised. A break lower puts EUR/USD 1.0806 back on the radar.

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.

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).
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.
The authors of this recommendation do not warrant the accuracy, completeness or value (commercial or otherwise) of any recommendation. Neither are the authors liable to those who receive these recommendations for the content of it or for any loss or damage arising (whether in tort (including negligence), breach of contract, breach of statutory duty or otherwise) from any actions or omissions of the authors in reliance on any recommendation, or for any claim whatsoever in respect of the content of, or information contained in, any recommendation. Any opinions expressed herein reflect the judgement at the time the investment recommendation was prepared and are subject to change without notice.
Given the nature of this advice (linked to currencies and interest rates) , the advice is overall not specific in nature.   As such there is no reference to any corporate finance contract and as such there is no 12 month overview based on the different advices.
This document is only valid during a very  limited period of time, due to rapidly changing market conditions.

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