Thursday, 10 February 2022
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•          The bond market sell-off took breather yesterday. There were no important data with investors counting down to today’s key US CPI release. Central bankers’ comments were plenty but didn’t alter the market assessment in any profound way. Fed members Bostic and Mester were on a same line, supporting a March rate hike. A 50 bps step isn’t excluded, but for now they favour a gradual approach of 25 bps at subsequent meetings. There is also a growing consensus to start the balance sheet roll-off soon and at a rather swift pace. US yields initially dropped 3-4 bps, but especially the short end soon rebounded. Investors apparently didn’t want to be wrongfooted by today’s expected multi-year high inflation. The US 2y yield still closed at a 1.36% cycle top. The longer end fared better, supported by strong investor interest at the Treasury’s $37bn 10y bond sale. At the close, the US curve again returned to a modest flattening trend with the 2y rising 2.3 bps and the 10y easing 2.3 bps. This time the real yield also eased mostly. The European yield correction had some more traction. German yields eased 5-6 bps for in the 2/10y sector. The very long end underperformed (-2.8 bps for the 30y). Equity investors embraced the calm on the bond markets. The EuroStoxx 50 gained 1.8%. US indices rose between 0.86% (Dow) and 2.08% (Nasdaq). Slightly USD supportive interest rate differentials combined with a positive risk sentiment kept the trade weighted dollar (DXY) more or less in balance (95.55). EUR/USD tried to move higher in the lower half of the 1.14 big figure, but the move had no strong legs (close 1.1425). Sterling underperformed with EUR/GBP rebounding from the 0.8415 area to close near 0.8441. BoE’s Chief economist Pill confirmed a further hiking cycle but also advocated a gradual pace.
•          Focus turns to the US January CPI release today. Headline inflation is expected at 0.4% M/M and 7.2% Y/Y, which would be the highest reading since 1982. Core inflation might accelerate to 5.9% Y/Y from 5.5%. The pace, especially M/M dynamics, will determine whether the Fed should consider a 50 bps hike. Yesterday’s late session rise in ST yields suggests that markets are positioned for a high figure. So there could be some further ST consolidation after the recent yield rise. If so, the room for a substantial yield correction stays limited. European yields yesterday eased off recent peak levels. Also here, we expect the 0.10% level for the German 10y and the 0.60% for the 10y swap to offer solid support. EUR/USD currently stabilizes in a tight 1.1395/1.1485 consolidation range. If US inflation doesn’t surprise on the upside, a retest of 1.1485 is possible. For sterling, quite some BoE tightening is already discounted. Some further sterling underperformance, both against the euro and the dollar might be on the cards. Also keep an eye at the Riksbank policy meeting. Will this ‘last man standing’ finally also leave ‘team temporary’?

News Headlines

•          Speaking before the Chamber of Commerce, Bank of Canada governor Macklem said the central bank won’t be on “autopilot” when it starts raising interest rates, most likely in March. He hinted that much will depend on business investment, noting that all else being equal, the less investment there is (because of inflation uncertainty), the higher rates will have to be. According to the governor, the current strong price growth (4.8% Y/Y in December) is not “the result of generalized excess demand” but mostly a supply issue. Productivity growth is essential to have non-inflationary growth, he added. Macklem said interest rates may even have to rise above the neutral rate around 2.25%. The Canadian dollar marginally strengthened to USD/CAD 1.267.
•          The central bank of India left the repo rate unchanged at 4%. The reverse repo remains steady at 3.35%, defying expectations of a hike to 3.55% which would have indicated a tighter policy stance to mop up excess liquidity. Indian inflation came in at 5.59%, above the 4% mid-point target, but the central bank chooses to help growth recover from the omicron hit. Governor Das said this will allow India to grow at the fastest pace among major economies. GDP growth is projected at 7.8% for the next fiscal year 2022-2023 after growing 9.2% this FY. Inflation is forecasted to ease from 5.3% this FY to 4.5%. The Indian rupee briefly went north of USD/INR 75 before paring losses to 74.93.


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 near 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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