Friday, 11 March 2022
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•          The ECB delivered a hawkish surprise. The APP will wind down more rapidly with purchases of €40bn in April, €30bn in May and €20bn in June. Previously, those same amounts would have been bought in all of Q2, Q3 and Q4 respectively. On the condition data evolves as expected (ie inflation outlook does not weaken), net buying will end in the third quarter. This allows for a first rate hike in the fourth quarter. This ticks the box of a rate move taking place “some time” (changed from “shortly after”) QE ends. The decision implies that despite the fall-out of the war on European growth (slight downward revisions), upside risks to inflation (materially upgraded, especially near-term) dominate. With US February CPI (7.9%) coming in exactly as expected, we had a clean view on what turned out to be a text book (bond) market reaction. The German yield curve bear flattened, adding 10.6-10.9 bps in the 2y-5y sector and 2.4 to 5.8 bps in the 30y and 10y. Real yields’ increase strongly outpaced the decline in inflation expectations. European swaps jumped up to almost 15 bps with, amongst others, the 2y and the 10y closing at new recovery highs. US yields added up to 5.3 bps at the belly in knock-on effects. European stocks retreated more than 3% but already suffered long before the ECB policy meeting. EUR/USD briefly sprinted to 1.11+ but couldn’t maintain gains. The general risk-off outweighed interest rate support. The pair finished at 1.0986. Seeing some safe haven flows, the trade-weighted dollar bounced off 98 to 98.5. EUR/JPY eased sub 128. Euro vs sterling was more balanced with the couple sticking near to the 0.84 big figure. Oil on commodity markets continued to ease from multi-year highs though the pace eased. Brent finished at $109.33 per barrel. Dutch gas futures finished 19% lower.
•          Asian stock markets started the final day of the week on soft footing. The risk-off is inspired by yesterday’s European and to a lesser extent US performance rather than bad news hitting the screens. Most indices still trade 1 or 2% in the red though left behind intraday lows. China swapped losses for minor gains. Core bonds eke out a slight gain. The euro is better bid, the dollar trades mixed. EUR/USD is attacking the 1.10 big figure. The Japanese yen underperforms heavily. USD/JPY surged beyond recent highs to 116.65 – the strongest level since early 2017.
•          We expect the gently improving Asian sentiment to roll over into European dealings. It will dominate today’s economic calendar of secondary importance (US Michigan consumer confidence and UK industrial update). Signs are emerging that markets are looking past the war. Eg. yesterday’s failure in talks between Ukraine’s and Russia’s foreign ministers didn’t add to the negative sentiment. Risk-on bets may be dampened somewhat by the weekend lurking, but we hold a cautious optimistic bias on EUR/USD with the ECB now guarding its downside. First resistance situates at 1.104, followed by 1.1163/7. Core bond yields are protected by real yields bottoming out. We look for the European swap yields at the front and back end to hold and finish the week above the previous recovery highs.

News Headlines

•          The Czech Central Bank commented on February inflation which earlier was reported at 1.3% M/M and 11.1% Y/Y. The outcome was higher than the CNB winter forecast mainly due to food but also to higher administered prices as a result of growth in housing-related energy prices and rapid growth in fuel prices. Core inflation was slightly higher too, at 10.4% versus a 10.2% forecast. The CNB expected inflation to peak at around 10% in the first half of this year and return close to the 2% target in the first half of 2023. However, as a result of extreme price pressures due to the war in Ukraine and the koruna depreciating, inflation is very likely to record a further noticeable, albeit temporary, increase in the months ahead. Rusnok repeated he can’t rule out a slight rate hike at the March 31 meeting. At the same time, inflation will prevent the CNB from cutting interest rates near the end of the year.

•          According to comments from people close the President Biden, the US president intends to end normal trade relations with Russia. Removing this status would open the way for raising tariffs on Russian goods. Republican and Democratic lawmakers already called for this action. The measure also needs approval in Congress.


European yields recovered from the setback by the Russian-Ukrainian war. It will slow down growth but didn’t deter the ECB from formally stepping up the normalization plans. QE is to end in Q3 with a rate hike in the next quarter. Real yields may further bottom out while inflation expectations may ease but will probably remain elevated. After swiftly returning above the 0.14%-0.16% area, the recovery high is back in focus.

Fed talk since the geopolitical escalation suggests policy normalization to fight consistently high inflation won’t be delayed. Real yields declined but avoided new record lows. Spiraling energy prices put inflation expectations on an upward path in the US too (>3%). The previous cycle highs in nominal yields are not too far away.

EUR/USD tested the 1.08 pandemic support zone but survived. A subsequent short squeeze propelled the pair then back to 1.10. The ECB sticking to – accelerating even – the normalization schedule is a (latent) positive for the common currency. It protects EUR/USD’s downside in the current uncertain circumstances.

Sterling proves no longer resilient to the uncertain risk environment. Combined with new-found euro vigor, EUR/GBP took out the first resistances between 0.82 and 0.83. A return above 0.845/72 would bring the pair back in the sideways trading range that dominated 2021. Regarding monetary policy, the balance after the March ECB meeting turned more even.

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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This document is only valid during a very  limited period of time, due to rapidly changing market conditions.

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