Tuesday, 10 May 2022
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•          Bond markets are in a schizophrenic state of mind these days. Core bond yields surge at one occasion, bracing for super aggressive tightening cycles by the likes of the Fed but tumble at another when pondering the consequences for growth. The latter took hold yesterday and it was bad news for stocks (again) and commodities. European equities slid a little less than 3%, the Nasdaq underperformed on Wall Street (-4.3%). Brent oil and iron fell about 6%, helping inflation expectations to ease and bull steepening core bond yield curves. The US curve wiped out 6.4 bps (20y) to 14.6 bps (5y). European swap yields slid about 7 bps at the front while still adding >2 bps in tenors from 10y on. UK Gilt yields joined the haven bid and shed as much as 11 bps (2y). The Japanese yen outperformed currency peers but was very closely followed by the dollar and even the euro. EUR/USD tested the 1.05 big figure for an umpteenth time before rebounding. The pair finished at 1.056, marginally up from 1.054. The British pound lost against its two main competitors but closed off intraday lows. EUR/GBP rose to 0.856, cable (GBP/USD) capped losses to 1.233. BoE hawk Saunders in an interview explained his vote for a 50 bps hike at the meeting last week. Moving early may limit the total of the tightening cycle, he said, and would give a clear signal to markets.

•          Asian stock markets followed the US by opening with deep losses. Sentiment then gradually improved. Equities currently trade about 1-1.5% lower. Hong Kong underperforms in a catch-up move (closed yesterday). Core bond (futures) initially built on yesterday’s gains but that move ran into resistance soon. US yields trade 1-1.4 bps higher across the board. The yen went from first yesterday to last this morning. The dollar trades slightly weaker as well. EUR/USD inches closer toward 1.06.

•          There’s a slew of ECB and Fed speeches by, a.o., Williams, Mester, de Guindos and Villeroy scheduled today. They take center stage as markets start the countdown to tomorrow’s US CPI reading. Turning to global markets, we have seen in the past that any downward yield correction usually doesn’t last long. For the moment we see no reason why this would be different this time. The sharp intraday U-turn in core bonds during Asian dealings serves as a point in case. EUR/USD’s performance, both yesterday and this morning, may provide euro bulls some comfort. We remain skeptical for the short run though as long as the ECB hotshots (Lagarde, Lane) don’t give the proverbial green light to a normalization cycle. BRC retail sales were awful (see below) but sterling is probably more interested in Thursday’s GDP numbers.

News Headlines

•          In its semi-annual financial stability report, the Fed warned that uncertainty on the economic outlook has increased since November due to the Russian invasion un Ukraine. Inflation has been higher and more persistent than expected, even before the invasion, and uncertainty over the inflation outlook poses risks to financial conditions and economic activity. Some measures also indicate that market liquidity has deteriorated in some key markets. While the deterioration has not been extreme, risks are higher than usual. The report warns that elevated inflation and rising yields in the US could negatively affect domestic economic activity, asset prices and credit quality and financial conditions in general. US house prices also can be sensitive to shocks. In a separate statement, Brainard mentions the recent volatility in commodity markets. The war in Ukraine sparked large price movements and margin calls and highlighted a potential channel through which financial institutions could be exposed to contagion.

•          A survey of the British Retail Consortium suggests that the cost of living crisis in the UK is worsening. According the  survey, total sales declined 0.3% Y/Y in April. Like-for-like sales were even 1.7% below the level of the same month last year. The BRC data are reporting values rather than output, worsening the picture. The consortium warns that more pain is inevitable as stores have to raise prices further to protect their profit margins. Spending on expensive items such as furniture and electrical goods felt addition headwinds as delays in shipments from China weighed on the availability of some goods.


The ECB will end net asset purchases in June. A first rate hike is likely in July (or even June?!). Runaway/elevated inflation expectations suggest the ECB’s response will still be too little, too late. They have been instrumental to the sharp rise in nominal yields although real yields recently have bottomed too. A break of the 1.13% area paves the way all the way up to 1.63/1.73%.

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 will start in June and hit max speed from September onwards. The psychologic 3% resistance turned into support. Next stop is 3.26% (2018 top).

EUR/USD lost the previous YTD low at 1.0806 and the 2020 bottom at 1.0636, suggesting a return to the 2017 low at 1.0341. ECB needs to step up its inflation response to give the single currency much needed backing. Russian war in Ukraine plays in the euro’s disadvantage as well.

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 doubt starting to filter through in markets. Open division within the BoE and the limited room for further tightening pushed EUR/GBP above the 0.8512 level. 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).
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.
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