Tuesday, 12 July 2022
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•          The dollar enjoyed another day in paradise yesterday. The greenback excelled at the start of the new week, sprinting higher against all of its most important peers during outright risk aversion. Recession fears already took over again after Friday’s solid payrolls brought some temporary comfort. The trade-weighted index (DXY) hit a new two-decade high of 108.02. That move coincided with USD/JPY breaking previous cycle highs to close at 137.44 (24-year high). Unwavering euro weakness added to EUR/USD’s protracted decline. The combination closed millimeters away from parity (1.004). EUR/CHF erased a two-day recovery to finish at 0.987. Sterling kept the upper hand over the common currency as well. Since breaking below the upward sloping trend channel, EUR/GBP fell about 1.5 big figures from 0.86 last Tuesday to 0.844 yesterday. Cable (GBP/USD) stuck to the YtD lows around 1.19 though. Meanwhile, several senior Tories warned for policy paralysis if outgoing PM Johnson sticks around until his successor has been chosen. This is due by September 5. Former Chancellor Sunak entered and is currently leading the early race. Moves in other markets were equally tainted by the risk off. Core bonds jumped with German Bunds outperforming UST’s in sessions that see liquidity increasingly drying up. German yields dropped between 7.2 (30y) and 10.1 (5y) bps. Peripheral spreads vs. Germany’s 10y rose by 2 bps. US yields were down 3.4 (2y) to 9.4 (20y) bps for the day. Equities fell 1-1.5% in Europe and between 0.5-2.3% in the US. Tech underperformed.
•          The negative mood spilled over into Asian dealings this morning. South Korean stocks lag (-2.2%). European equity futures suggest a red opening to the tune of -0.75%. The US yield curve flattens by 3.5 bps at the front and it remains dollar dominance on FX markets. EUR/USD came as close to parity as 6 pips. Given the lack of economic data we expect the current market atmosphere to set the tone for trading today. A test of the highly symbolic EUR/USD 1 level looks inevitable. A break paves the way to intermediate support around 0.96. But the actual reference is the all-time low of 0.823. The market is shunning the euro while stacking up dollars for the rainy days to come. It poses yet another difficult trade-off for the European Central Bank as it jolts imported inflation even further. That said, markets are much less convinced than just a few months ago about the amount of rate hikes the ECB will be able to deliver with the continent in (energy) crisis mode. That’s less the case for the Fed, with the US economy still proving resilient (eg. Friday’s payrolls). We’re keen to see whether US June inflation figures due tomorrow are able to diverge markets focus again. In Europe, a €8bn EU dual tranche transaction is upcoming today, comprising a new 7yr benchmark due 4 December 20029 and a tap of the EU 0.45% 07/2041 bond.

News Headlines

•          According to the data from the British retail consortium (BRC), the nominal value of retail spending in the UK for the third month in a row printed below the level of the same month last year at -1.0% y/y (from -1.1% in May). However, as the data are not corrected for price rises, volumes of sales are declining sharply. According to BRC ‘sales volumes are declining at a rate not seen since the depth of the pandemic, as inflation continues to bite and also are cutting back spending’. BRC also signals that shoppers are shifting spending to cheaper brands of foods and other goods as well as postponing some purchases.
•          According to the New York Fed June 2022 survey of consumers expectations, US consumers see inflation rising further in the one-year ahead period from 6.6% to 6.8%. However, medium term inflation expectations (3-y ahead) eased to 3.6% from 3.9%. US consumers also expect a sharp slowdown the rise of house prices one year from now at 4.4% down from 5.8%. The decline is the second largest on record and the expected rise marks the lowest since February 2021. US households see higher unemployment and a rising probability of losing their own job in the year ahead (11.9% from 11.1%). Median year-ahead household spending growth expectations retreated from its series high in May, declining by 0.6 percentage point to 8.4% but remains well above its 2021 average of 5.0%.


The ECB turned the corner in its inflation narrative. The central bank ended net asset purchases, facilitating rate hikes from this month. Real yields took over from inflation expectations, pushing the German 10-yr yield to its highest level since early 2014. The move ran into resistance at 1.9% (50% retracement on long term decline) before correcting lower. First important support at 1.18%/1.15% is tested on recession fears, but survived.

The Fed started tightening and published an aggressive blueprint for the remainder of the year. A second 75 bps rate hike in July is likely. Quantitative tightening will hit max speed by September. Markets discounted a good deal already and general focus has shifted more towards implications for growth currently. The 2.72% area was tested but didn’t break. Sideways consolidation is in the cards.

The euro zone is in (energy) crisis mode and markets ponder the ECB’s wiggle room to deliver rate hikes even with inflation being sky high. Growing recession fears hammered EUR/USD below the 2017 low of 1.0341. Parity is being tested. A break lower paves the way towards intermediate support around 0.96 before a return to the all-time low of 0.823.

The BoE in June signaled it might step up tightening. Initially this didn’t help sterling. However, a combination of euro weakness, PM Johnson leaving, the sharp correction in the oil price and the BoE reiterating its anti-inflation commitment, finally triggered a sterling short squeeze, pushing EUR/GBP below the established uptrend.

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). Read the full disclaimer.

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