Thursday, 15 September 2022
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Markets

•          Yesterday, markets entered calmer waters after the massive sell-off in both bonds and equities triggered by higher than expected US August inflation data published Tuesday. Yields moves were much more moderate compared to Tuesday. Even so, a further curve flattening (EMU)/inversion (US) illustrates that markets are adapting to the idea that central banks won’t be able to ease their anti-inflation crusade anytime soon. The US 2-y yield rose another 3.2 bps. The 30-y eased 2.9 bps. A 75 bps hike is fully priced in for next week’s FOMC meeting. The market sees about a 1 in 3 chance for the Fed stepping up the pace of rate hikes to 1.0%. The German curve showed a similar picture with the 2-y adding 2.9 bps. The 30-y yield dropped 4. 7 bps. Eco data were only second tier yesterday. EC Chair Ursula von der Leyen’s State of the Union aired some options on how Europe might tackle the impact of high energy prices on the economy, but the message wasn’t concrete enough to have any impact on markets. Equities showed a mixed picture. European indices still felt some follow-through losses after Tuesday’s WS sell-off (EuroStoxx50 -0.52%). US indices finished in green (Dow + 0.1%; Nasdaq +0.74%) but gains after all were limited given Tuesday’s huge loss. The dollar also took a breather. DXY closed near 109.66 (from 109.82). USD/JPY left the 145 area (close 143.08) as Japanese authorities signaled high alert on further yen weakness that might translate into FX interventions. After Tuesday’s setback, EUR/USD hovered near parity without much of a clear direction (close 0.9981). Sterling slightly outperformed the euro (EUR/GBP close 0.8648) after UK inflation came in close to expectations at 9.9%.

•          This morning, sentiment in Asian markets remains inconclusive. Most indices are trading little changed with China underperforming. US yields continue drifting higher and so does the dollar (USD/JPY 143.65, EUR/USD 0.997).
US data again will take center stage today with the retail sales, weekly jobless claims, the Empire manufacturing survey, The Philly Fed business outlook and US production data scheduled for release. Especially the retail sales have market moving potential. A decline in gasoline prices is expected to put a lid on headline sales. However, core sales (control group expected at 0.5% M/M) still are expected to show decent growth. Retail sales is a notoriously volatile series. Even so, signs of resilience in global demand might reinforce the idea that the Fed has more work to do. In this respect, a good retail sales report might be no good news for risk sentiment. The DXY USD-index settled in a ST consolidation pattern between 107.60 and 110.32. We see risk for an upside test. After EUR/USD’s return below parity, the 0.9864 low might again come on the radar.

News Headlines

•          Australian employment grew by 33.5k in August, matching consensus estimates of 35k an undoing a chunk of the July losses (-40.9k). Despite job growth, the unemployment rate ticked higher from the 48-year low of 3.4% to 3.5%. It follows the participation rate rising from 66.4% to 66.6%, boosting the size of the labor force. It is expected that inbound migration could extend that trend further, potentially easing wage and thus inflationary pressures over time. Today’s data is seen strengthening the RBA’s case to slowdown the tightening pace after four consecutive 50 bps rate hikes. Markets attach a 60-40 probability on hiking by 25 or 50 bps at the October 4 meeting. Australian swap rates rise between 3.2 and 5.1 bps this morning. The Aussie dollar strengthens marginally vs the dollar (AUD/USD 0.675) but remains near two year lows.

 
•          Staying Down Under, GDP growth in New Zealand over the second quarter this year rebounded by 1.7% q/q after contracting 0.2% in Q1. The kiwi economy is now 0.4% larger than one year ago. Both the quarterly and the yearly figure beat estimates. The services industry (2.7%) lead growth, driven sectors benefiting from tourism. These include accommodation and food services (30% q/q), arts & recreation (19.9%) and transport services (19.7%). Goods-producing industries contracted sharply as manufacturing tanked 5.9%. On an expenditure basis, exports of services was a major boost (60.7% q/q) but household spending was weak (down 3.2%). The New Zealand dollar this morning rises marginally but left intraday highs already. NZD/USD continues to test important support at 0.60..
 

Graphs

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 range, but a sustained break lower was averted. The 3.50% barrier is coming within reach as the focus is back on Fed 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 as 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 tested the YTD high at 0.8721, taking a breather ahead of next week’s BoE meeting.

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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