Monday, 12 September 2022
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•          Daily changes on the US yield curve ranged between -2.8 bps (30-yr) and +5.3 bps (2-yr) last Friday. The US 2-yr yield closed above 3.55% for the first time since November 2007 as Fed governors lined up on the eve of the blackout period to cement a third consecutive 75 bps policy rate hike at the September 21 policy meeting. Washington-based Fed governor Waller said he favoured another significant increase in interest rates to get the policy rate to a setting that is clearly restricting demand. Kansas City Fed governor George stressed the clear-cut case for continuing removing policy accommodation, but suggests more caution ahead. She believes it’s hard to call a terminal rate and when it will be achieved. “We will have to determine the course of our policy through observation rather than reference to theoretical models or pre-pandemic trends. Given the likely lags in the pass-through of tighter monetary policy to real economic conditions, this argues for steadiness and purposefulness over speed”. St.-Louis Fed Bullard said that he was already leaning toward 75 ahead of the reasonably good payrolls report. He also hinted at a potential slowdown in the tightening cycle. “The general strategy of trying to front-load rate increases is working well and putting us in a position where we can have a level of the policy rate that is putting downward pressure on inflation very soon.” He targets 3.75%-4% by year-end without strong view for 2023. If any, he thinks that markets pricing in rate cuts already is a misjudgment.
•          The dollar didn’t profit from the yield advantage with EUR/USD trying to regain 1.01 as European energy ministers met to come up with short term fixes and structural changes to the power market. A relief rally on stock markets resulted in gains of up to 1.5% for Europe and 2% for the US. From a technical point of view, EUR/USD is closing in on the upper bound of the downward trend channel in place since February (+- 1.0150). Last week’s hawkish ECB message remains in play as well. German Bundesbank president Nagel said in a radio interview yesterday that the 75 bps rate hike was a clear sign and that further clear steps must follow if the inflation picture remains the same. ECB board member Elderson said that more hikes will come as “it’s very important that the expectations that the people have on how inflation will develop in the medium to long term will not become deanchored.”
•          Today’s eco calendar only contains second tier eco data. Speeches by ECB vice-president de Guindos and Schnabel are interesting and could generate some additional euro-momentum, especially if risk sentiment remains positive. Asian bourses are this morning in any case in well shape. Later this week, focus turns to US inflation (tomorrow) and retail sales (Thursday). Monthly UK eco data grab more attention as the Bank of England delayed its policy meeting.

News Headlines

•          Sweden Democrats are poised to be the largest party on the right and the second-largest overall following the parliamentary elections yesterday. With about 94% of the votes counted, the rightwing opposition now has an extremely narrow lead of under one percentage point over the ruling center-left group led by PM Andersson. The PM’s Social Democrats would still be the biggest party, extending a tradition that goes back all the way to 1917. A preliminary result of the election isn’t expected until Wednesday. But if the rightwing lead is confirmed, Kristersson of the centre-right Moderates is the favourite to become the next prime minister. The Swedish krone’s first reaction during Asian dealings is stoic. EUR/SEK trades around 10.68.
•          EU’s Brexit negotiator Sefcovic said physical custom checks across the Irish Sea could be reduced to just a few lorries a day. The offer was a response to UK PM’s Truss saying she was ready to make a deal over the Northern Irish protocol last Wednesday. The UK demands no checks at all but Sefcovic said there is almost no difference with his proposal of minimum checks, only to be made when there is “reasonable suspicion” of, amongst others, illegal smuggling. Talks between Brussels and London over the issue died back in February.


The ECB ended net asset purchases and lifted rates with a 50 bps inaugural hike and a 75 bps follow-up move. More tightening is underway but the ECB refrained from guiding markets on the size of future hikes. Germany’s 10-yr yield broke out of the corrective downward trend channel since mid-June, suggesting more upside. The YTD high at 1.93% comes into play.

The Fed hiked to neutral by a back-to-back 75 bps in July. The size of future moves depends on the incoming data. QT hits max speed. The 10y briefly dropped below the lower bound (2.70% area) of the sideways trading range, but a sustained break lower was averted. The focus is back central bank frontloading to tackle inflation.

EUR/USD is in a strong downward trend channel since February. Last week’s hawkish ECB meeting, attempts to tackle the energy crisis and a risk rebound gathered some euro-momentum. The upper bound of the downward trend channel kicks in a first resistance around 1.0150.

The Bank of England hiked by 50 bps in august. More hikes are coming but are priced in already. Combined with the BoE’s grim economic assessment it triggered a profit-taking move. EUR/GBP broke out of the corrective downward trend channel since mid-June and is about to test the YTD high at 0.8721.

Calendar & Table

Note: All times and dates are CET. More reports are available at 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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