Wednesday, 13 April 2022
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•          Yesterday’s US CPI caused investors to take a step backward and assess the standing uptrend in US/global yields. Both the headline CPI (1.2% M/M and 8.5% Y/Y) and core (0.3% M/M and 6.5% Y/Y) reached the highest levels since 1981/1982, but contrary to previous months, there was no upside surprise. Core inflation even rose less than expected. The jury is still out whether this marked some kind of peak. Even if so, a more important question is whether this will be start of a real and protracted slowdown (decline in M/M dynamics). Whatever, after touching cycle peaks for yields at maturities longer than 5 year earlier, US bonds were caught in a ‘profit taking short-squeeze’. The US yield curve steepened with the 2-y/5-y easing 9.2/9.5 bps, the 10-y lost 5.9 bps. The 30-y still gained marginally (+0.1 bp). Markets now will look out for further Fed communication on frontloading of policy normalization. We don’t expect any change of the (hawkish) tone yet. EMU markets showed a similar steepening move (German 2-y -5.3 bps, 30-y + 1.9 bps), but the correction was more modest as investors were looking forward to the assessment at the ECB meeting tomorrow. The easing in the bond sell-off initially propelled US equities. However, headlines from Russian president Putin that talks with Ukraine were ‘at a dead end’ dampened optimism. Major US  indices closed about 0.3% lower. The correction on US yields didn’t hurt the dollar. On the contrary: DXY closed north of 100 for the first time since May 2020. EUR/USD immediately after the US CPI release touched the 1.09 area, but the move lacked momentum and persistent uncertainty on the war in Ukraine/Putin comments didn’t help. EUR/USD closed at 1.0828, within reach of the YTD low of 1.0806. USD/JPY also closed little changed at 125.38.

•          This morning, the pause in the US yield rally also gives some breathing room for Asia. Equity markets mostly trade in positive territory with Japan outperforming. The dollar remains well bid. USD/JPY (125.60) is again with reach of the 2015 top (125.86). Later today, the calendar contains the US PPI (headline expected to rise to 10.6%). However, we doubt this report will change markets’ assessment after yesterday’s CPI release. On interest rate markets, we look out whether yesterday’s correction as further to go. The picture/trend especially for LT yields both in the US and Europe hasn’t changed in any profound way. Especially in Europe, an ongoing rise in inflation expectations supports yields at longer maturities. On FX markets question is whether EUR/USD can avoid a return/break of the 1.0806 YTD low. Probably a convincing anti-inflation message from Lagarde an Co is needed to ‘save’ the euro. This morning, both UK core (5.7% Y/Y) and headline CPI (7.0% y/y) surprised on the upside. It questions recent soft BoE speak. Even so, sterling hardly gains in a first reaction (EUR/GBP 0.8330).

News Headlines

•          The Reserve Bank of New Zealand stepped up its tightening cycle by unexpectedly raising its policy rate by 50 bps (to 1.5%) instead of 25 bps like at the previous three meetings. The MPC also agreed to continue to tighten monetary conditions at pace even as they remain comfortable with the outlook as outlined in February. This implies a 2.2% policy rate end this year and 3.3% by end of 2023. Moving the policy rate to a more neutral level sooner, reduces the risks of rising inflation expectations. A larger move now also provides more policy flexibility ahead in light of the highly uncertain global economic environment. First local signs come from weakening consumer confidence (eco uncertainty + inflation) and a reduction in mortgage demand and house prices (rise in mortgage rates). The NZD swap curve bull steepens this morning (up to 15 bps lower for 2-y tenor) as markets ran ahead of their selves and the February RBNZ guidance. The MPC sticking to that view now triggers some return action despite the 50 bps rate hike. NZD/USD attempted to take out the 0.69 big figure, but failed to do so and tumbled to the low 0.68-area.

•          Bloomberg reports that China is allowing Shanghai, Guangzhou and six other cities to shorten quarantines for overseas travelers and those who’ve had a close contact with infected individuals from 14 days to 10 days as authorities test potential tweaks to the country’s rigorous Covid-measures. Apartment complexes, retail outlets and office building will also be allowed to reopen more quickly. The trial period will run for a month.



European yields (more than) recovered from the early stages of the Russian-Ukrainian war as the expected growth slowdown didn’t deter the ECB from 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 German 10-y yield surpassed the 0.80% 2018 top. If confirmed, it would signal that European bond markets are entering a new era.

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 initially developed a 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 is taking a breather post-CPI , but the trend hasn’t changed.

The ECB sticking to – accelerating even – the normalization schedule was 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 as the dollar remains in the driver’s seat. EUR/USD 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 trading off the 0.8203 2022 low, but further gains in the 0.83/0.85 area remain difficult for now.

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).
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.
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