Friday, 11 February 2022
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•          Over the previous week, ECB Chair Lagarde’s U-turn on the inflation assessment and strong US payrolls caused hefty turbulence on interest rate markets on both sides of the Atlantic. Yesterday’s US CPI release triggered nothing less than a real earthquake. US headline and core inflation respectively jumped to 7.5% and 6.0% Y/Y, the highest readings since 1982. Price rises were broad-based (services 4.6% Y/Y, housing 5.7% Y/Y, transportation 20.8% Y/Y) illustrating that the erosion of consumers spending power is going far beyond an energy driven rise (27 % Y/Y). The M/M dynamics (0.6%) also provides little evidence that a major improvement is around the corner. The data evidently was a major driver for the sharp rise in yields. However, the debate on the Fed reaction function is at least as interesting. Comments from Fed governors Barkin and Daly that a 50 bps hike is no done deal yet, are behind the (market) curve. St Louis Fed Chair Bullard set the debate on a different, more market oriented/ forward looking path. He agreed with market pricing of a 1% combined rate hikes by July 1, stating with 50 bps in March. He is even open to an inter-meeting increase. His comments were the straw that broke the camel's/bond markets back. The 2-y US yields jumped 21.4 bps to close at 1.58%. The 10-y (+8.8 bps) settled well above the psychological level of 2.0% (2.03%). Markets currency almost fully price a 50 bps March increase and 1.75% of increases by the end of the year. The German yield curve rose between 1.8 bps (2-y) and 7.2 bps (10-y) but still has to incorporate Bullard’s comments. The dollar gained sharply immediately after the release but more than returned the gains as US equities showed resilience. EUR/USD even revisited the 1.1485/95 resistance. However, Bullard’s comment gave the USD a lifeline. EUR/USD closed at 1.1428. DXY also closed little changed at 95.55. US equities initially limited the damage, but closed the session with losses between 1.47% (Dow) and 2.1% (Nasdaq).

•          This morning, Asian markets are losing between 0.5% and 1.75% in the wake of yesterday’s sharp rise in US yields. (Japanese markets are closed). Today’s eco data (U Michigan consumer confidence & Q4 UK GDP) probably will only be of intraday significance. After yesterday’s CPI release and comments from Fed Bullard, markets will unlikely substantially backtrack on a March 50 bps hike. Short-term, the question is whether there will be additional backing for a pre-March intermediate hike. Fed comments fighting this idea might even put further pressure at longer maturities. The 2.0% level for the 10-y soon might become a support. Yesterday’s sharp repositioning again might provide the dollar some kind of short-term ‘policy divergence premium’. After a new rejected test of the high 1.14 area, further return action lower in the 1.13 big figure might be on the cards, but don’t expect a return to the 1.1121 correction low.

News Headlines

•          Appearing before the House of Representatives, RBA governor Lowe reiterated that a rate hike in 2022 was plausible but that he first wants to see a couple of (quarterly) CPI’s before deciding to. Wage developments will be crucial. Lowe said wage increases currently are no more than “two point something” percent, adding that they are now seeing a steady flow of foreign workers entering Australia. Money markets pulled forward the timing of a first rate hike regardless. They now expect the rate lift-off in June with a total of five hikes discounted. Spill-over effects from the US are at play as well. Australia’s yield curve flattens with yields 14 bps higher at the short end. AUD/USD loses out amid risk-off and a strong USD. The pair falls from 0.716 to 0.711.

•          The Mexican central bank (Banxico) raised its benchmark interest rate by 50 bps to 6%. The 4-1 decision came as no surprise. Ahead of the meeting, January (core) inflation came in at 7.1% (6.2%) vs. the central bank’s 3% target. The higher-than-expected figures prompted the central bank to lift its forecasts for this year and the next. Risks remain to the upside and Banxico is wary of the rising inflation expectations as a result of the greater and the longer than anticipated inflationary pressures. More (50 bps) rate hikes are likely. USD/MXN rose to 20.57 on dollar-strength.


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 January CPI release also propelled it above the psychological 2% mark. The Fed’s hawkish policy turn triggered a surge in real yields. A 50 bps March rate hike has 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. 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. However, the sharp rise in US yields caps a break beyond 1.15. Some further USD comeback is likely, but we don’t expect a return to the 1.1121 correction low.

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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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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