Wednesday, 9 February 2022
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•          The repositioning/sell-off on core bond markets yesterday simply built on the established dynamics even without high profile eco news. A bit different from recent dynamics, the rise in core yields this time didn’t really translate into a substantial further flattening of the yield curves. The US yield curve rose between 5.7 bps (5y) and 4 bps (30y), with real yields (10y) still responsible for the lion’s share of the rise. The US treasury’s $50bn 3y bond sale met with strong end investor demand (above average bid-cover of 2.45). However, the successful sale didn’t really change the intraday dynamics. The German curve bear steepened with yield changes between -1.1 bp (2y) and +6.2 bps (30y). In an address before the finance committee of France’s national assembly, ECB Villeroy assessed that markets probably went too fast in their reaction after last week’s ECB policy meeting. He signaled that the bank won’t engage in a monetary tightening and won’t go beyond a neutral orientation. Even comments from ECB Lagarde on a gradual ECB approach on Monday didn’t impress markets. Intra-EMU spreads versus Germany continued their widening trend with Italy underperforming (+3 bps). Greek bonds slightly outperformed (-5 bps) coming on the back of a sharp underperformance post-ECB. European equities mostly showed modest gains, but strong earnings inspired US equites to close near session highs with the Nasdaq closing at + 1.28%. The dollar slightly outperformed despite the risk rally. USD/JPY (close 115.55) is nearing 115.68 short-term resistance. EUR/USD closed at 1.1415 (from 1.1442). However, for now the technical picture hasn’t really deteriorated. Sterling profited only modestly from a further sharp rise in UK yields. EUR/GBP closed at 0.8429.
•          Asian markets join the constructive close on WS yesterday evening with gains on average between 1% and 2%. The rise in US yields is taking a breather. However, we don’t draw any firm conclusions, with US bond investors still looking forward to tomorrow’s US CPI release. Today, the US and EMU eco calendar is again extremely thin. Comments from BoE chief economist Pill and Fed’s Mester are worth looking at. Also keep an eye at the sale of $37bn of US Treasuries (10y). A pause after the recent steep yield rise is possible, but for now we don’t see any trigger for a sustained correction as central banks probably will have to act swiftly to address persistent inflationary risk. With the Fed and the ECB now looking in the same direction, the odds for the EUR/USD cross rate also look more balanced. A short-term trading range might develop between 1.13 and 1.1484. The yen still underperforms. A break of USD/JPY above 115.68 would open the way to the January/multi-year top of 116.35. EUR/GBP is holding resilient. The downside looks better protected with first support in the 0.8350 area.

News Headlines

•          Hungary is doubling down on a pre-election spending spree. It will pay out the largest pension bonus so far today, worth €1bn. It follows a higher-than-expected annual increase in pension payments from January, costing the country an annual €550 million. Families with children will get a personal income tax rebate later this month totaling €1.7bn and workers younger than 25 won’t have to pay any. These are a few of the additional spending measures announced since the 2022 budget was published last summer. They come ahead of a general election in April, PM Orban’s toughest since he took office in 2010 after an unusual alliance by six opposition parties to oust him.
•          The National Bank of Poland raised rates yesterday by an expected 50 bps to 2.75%. The economy is strong, rising an estimated 5.7% in 2021. The labour market continues to tighten, leading to a marked increase in average wages. Inflation hit 8.6% y/y in December. Rising household income, energy prices and ongoing supply chain disruptions will keep inflation elevated also in 2022. Monetary policy tightening should decrease price growth over time but there are risks that it will run above the 2.5% (+/- 1%) target over the policy horizon. This implies further tightening at the current pace is likely. The NBP welcomes PLN-appreciation, saying in an added sentence that it would be consistent with the current direction of policy. The Polish zloty finished the day marginally stronger at EUR/PLN 4.528..


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), with 0.40% as next reference .

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 its 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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