Monday, 11 April 2022
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•          On Friday, selling on bond markets simply continued in the wake of the hawkish messages provided by the minutes of the Fed and ECB March meetings published earlier last week. Persistent high inflation is putting the hawks in the driver’s seat. In a weekly perspective, the prospect of an early start of an accelerated Fed balance sheet roll-off (a pace of $95 bln p/m already in summer) bear steepened the US yield curve. Friday, the steeping trend eased, but bond selling continued with yields rising between 6.2 bps (2-y) and 1.9 bps (30-y). The internal debate in March also caused investors to look forward to this week’s ECB policy meeting for further signs that the central bank might be ‘forced’ to frontload its interest rate lift-off, probably to Q3. The European swap curve on Friday bear flattened with yields rising between 9.25 bps (2-y) and 5.3 bps for the 10-y. The 30-y yield was little changed. The congruent rise in both US and an EMU interest rates for now still favours the dollar. The greenback’s interest rate advantage remains impressive and the conviction rate on the Fed’s anti-inflation intentions clearly remains much higher than the ECB’s. The event risk of the first round of the French elections also didn’t help the euro. EUR/USD closed a disappointing week at 1.0877. The TW dollar (DXY) temporarily surpassed 100, but closed just below. Sterling both underperformed the euro and the dollar with EUR/GBP rebounding from the low 0.83 area to close near 0.835.

•          The bond market sell-off resumes in Asia this morning causing a further risk-off sentiment on regional equity markets. China price data (PPI 8.3% and CPI 1.5%) also surprised on the upside. At the same time, massive lockdowns in the likes of Shanghai have to be extended, raising further concerns on growth, but also on broader supply chain issues. US yields are again rising up to 7 bps+. The Australian 10-y yield surpassed the 3.0% barrier this morning. 
Today’s eco calendar is mostly focused on CPI data in smaller countries. In the US, we keep an eye at $46 bln 3Y auction. Fed speakers remain a wildcard. Later this week, the US March CPI (Tuesday) is expected to accelerate to 8.4% Y/Y. US retail sales (Friday) might give an indication whether inflation is eroding consumers’ spending. In Europe, investors look out for more concrete guidance on the ECB lift-off and on the pace of rate hikes as Lagarde & co meet on Thursday. UK inflation (Wednesday) might challenge recent ‘soft’ BoE communication. At least for now the rise in global yields doesn’t look like taking a breather. The 10-y EMU swap Friday surpassed the 2015 top (1.3725), a clear indication that interest rate markets have entered a new era. The US 10-y yield is near the 2.80%, the last barrier ahead of the key 3.25% 2018 top. Also keep an eye at the US 10-y real yield (-0.11%) which is nearing positive territory. The French election outcome clearly isn’t a game-changer for the euro. The dollar remains in pole position. USD/JPY is revisiting the 125 barrier. For EUR/USD (1.0885), the 1.0806 YTD low remains at risk.

News Headlines

•          The French presidential elections of 2022 are 2017 all over again. Incumbent president Macron in the first round on Sunday secured about 27% of the votes. His closest contester, Marine Le Pen from the far-right won some 24%. Both are now headed into the run-off vote on Sunday, April 24. Some of the candidates, including the Republican Valerie Pecresse and Green leader Jadot endorsed Macron. They both got around 5% of the votes. The biggest question mark however, is what voters for Melenchon from the far-left will do. He came in third (21%) and told not to vote for Le Pen but didn’t back Macron either. The euro briefly rallied to EUR/USD 1.096 in Asian trading but pared gains quickly thereafter.

•          Officials familiar told Bloomberg the European Central Bank is crafting another crisis tool to deploy should yields in weaker economies rise considerably caused by shocks outside the control of individual governments. The ECB announced in December last year that PEPP would soon phase out. By allowing for geographical flexibility in the PEPP reinvestment phase, temporarily raising amounts bought under the APP and keep that programme alive at least until early 2023, it cushioned the blow in particular for the likes of Italy. Since then a lot has changed. The Ukraine war lifted uncertainty and APP could stop as soon as Q3 this year. Peripheral yield (spread) only briefly dropped after the news on Friday got public.


European yields recovered from the early stages of the Russian-Ukrainian war as the expected growth slowdown didn’t deter the ECB from formally stepping up the normalization plans. QE is to end in Q3 with a rate hike already possible in the same quarter. The trend in yields remains north.

The Fed started its tightening cycle and published an aggressive blueprint for the remainder of the year. A 50 bps rate hike May is likely. The US yield curve extended its bear flattening trend. However, plans to shrink the balance sheet to be published in May also support yields at longer maturities. The sell-off on core bond markets isn’t over.

The ECB sticking to – accelerating even – the normalization schedule is a (latent) positive for the common currency. After first protecting EUR/USD’s downside, it next triggered a test of first resistance at 1.1121. A sustained break higher didn’t occur. The pair falling out a closing triangle pattern puts EUR/USD 1.0806 back on the radar.

EUR/GBP took out the first resistances between 0.82 and 0.83. The March ECB and BoE meetings restored some kind of monetary policy balance. The BoE even turned more dovish, but markets question this turn. EUR/GBP is showing signs of bottoming out.

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).
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