Friday, 8 July 2022
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•          ‘Reflation’ in the current context probably isn’t the right term. Even so, the risk rebound that started Tuesday in the US, continued. Eco data remain a bit inconclusive (jobless claims, trade data, challenger job cuts), but especially US data were recently good enough for investors to see the glass again half full. US equites gained between 1.12% (Dow) and 2.28% (Nasdaq). The Eurostoxx 50 even rebounded 2%. Fed members Waller and Bullard repeated their call for a 75 bps hike at this month’s meeting and at the same time downplayed the risk of a US recession. Markets yesterday accepting this analysis only illustrates the change in sentiment since early this week. Question is how long it will take for uncertainty on growth to return. Whatever the driver, core yields extended their rebound off key technical levels that started earlier this week. US yields rose between 1.2 bps (2-y) and 6.6 bps (10-y and 30-y). The rise was mainly driven by higher inflation expectations. This move was supported by a bottoming in commodities (oil, copper, wheat). European/German yields followed the broader ‘reflation’ trend (2-y + 17 bps, 10-y + 11.2 bps,.30-y outperformed + 2.9 bps). The risk rebound for now didn’t cause any meaningful correction in the dollar. The DXY stayed near the cycle top (107 area). USD/JPY hovered around 136. USD resilience went hand-in-hand with persistent euro weakness. EUR/USD lost further ground (close 1.016). Sterling outperformed. The ‘end’ of the political crises and BoE members flagging a 50 bps August rate hike apparently trigger a sterling short squeeze. EUR/GBP tumbled from the 0.8540 area to close at 0.8450.

•          Sentiment in Asia remains constructive even as gains are more modest compared to the US and Europe yesterday (Topix +0.9%). Investors are pondering the potential positives of Chinese plans to support growth via additional infrastructure spending. US yields open little changed. The dollar is holding strong (DXY 107.1). Later today, US payrolls are expected to show a slowdown in hiring from 390k to about 270k. Still solid, but slower employment growth maybe shouldn’t be that negative for risk sentiment and might support the recent rebound in equites and, to a lesser extent, in core yields. In theory, this might slow the USD rebound. However, especially EUR/USD recently didn’t show any signs of improvement. A rebound of the single currency looks difficult as long as the ‘war-on energy’ with Russia persists.

News Headlines

•          The latest UK jobs report (June) from KPMG and REC (recruitment & employment confederation), compiled by S&P Global, suggests that the labour market is showing signs that we’re past the post-pandemic hiring spree. Overall demand for workers remains high, but increased at the slowest pace since March 2021. A similar trend is visible in permanent staff placements and temp billings. On the supply side, there’s a new steep drop in availability of staff with a generally low unemployment rate, fewer foreign workers, robust demand and hesitancy to switch roles in the increasingly uncertain economic climate as main drivers. The imbalance between supply and demand pushed the rate of starting pay again higher in June (well above average), though the rate of salary inflation slightly moderated.

•          The National Bank of Poland continued its tightening cycle with a smaller-than-expected 50 bps rate hike (6% to 6.5%). It will remain data-dependent for upcoming meetings and pledges to take all necessary actions in order to ensure macroeconomic and financial stability, including above all to reduce the risk of inflation remaining elevated. FX interventions to prevent the (weaker) zloty from interfering with policy tightening remain a possibility. The NBP updated its growth and inflation forecasts. Inflation is now expected to be 13.2-15.4% this year, 9.8-15.1% next year and 2.2%-6% in 2024, assuming an unchanged policy rate. These data represent significant upward revision for this year and next compared to March. Annual growth is predicted at 3.9%-5.5% this year, 0.2-2.3% next year and 1%-3.5% in 2024. The 2023 numbers faced a big downward shift compared to March. The Polish zloty managed to limit losses in a positive risk climate despite the smaller hike. EUR/PLN touched 4.8 for the first time since March. Polish zloty swap rates dropped 30-35 bps in the 5-10y segment of the curve with the wings underperforming.


The ECB turned the corner in its inflation narrative. The central bank ended net asset purchases, facilitating rate hikes from this month. Real yields took over from inflation expectations, pushing the German 10-yr yield to its highest level since early 2014. The move ran into resistance at 1.9% (50% retracement on long term decline) before correcting lower. First important support at 1.18%/1.15% is tested on recession fears, but survived.

The Fed started tightening and published an aggressive blueprint for the remainder of the year. A second 75 bps rate hike in July is likely. Quantitative tightening will hit max speed by September. Anticipation on even faster Fed tightening pushed the 10-y yield to a new multi-year high of 3.5%. A sharp correction caused a test of the 2.72% area, but this key support didn’t break.

EUR/USD tested the 2017 low at 1.0341 in May and June. The pair (temporarily) rebounded mainly as the broader dollar rally took a pause. EUR/USD 1.0806 resistance proved one step too far, even as the ECB formally announced to start hiking rates. Growing recession fears, finally hammered EUR/USD below 1.0341, opening the way for a return to parity (or lower?).

The BoE in June signaled it might step up tightening. Initially this didn’t help sterling . However, a combination of euro weakness, PM Johnson leaving, the sharp correction in the oil price and the BoE reiterating its anti-inflation commitment, finally triggered a sterling short squeeze, pushing EUR/GBP below the established uptrend.

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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