Tuesday, 15 November 2022
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•          Yesterday was the first day of what we fear will be a November lull. The sharp repositioning after last Thursday’s US CPI release, the arrival of technical support/resistance levels, the absence of key eco data and central bank gatherings and reduced trading volumes in next week’s shortened Thanksgiving week set the stage for short term consolidation/corrections to continue. US yields added 2.1 bps (30-yr) to 5.8 bps (2-yr) yesterday compared to Thursday’s close (bond exchanges closed for Veteran’s Day). German yields lost 1 to 2 bps across the curve. EUR/USD closed almost unchanged at 1.0325 after failing to take out the key resistance zone of 1.0341/50/68. European stock markets gained up to 1% with main US gauges given gains away in the final trading hour to close up to 1% weaker following an incredible two-day rebound. The eco calendar was empty apart from outdated EMU production numbers for September (0.9% M/M vs 0.5% expected). We retain comments from Fed vice chair Brainard who said it would be appropriate to slow down the pace of rate hikes soon. In line with recent Fed chorus, she stresses that the US central bank’s inflation fight isn’t done yet and that the Fed needs to remain vigilant. Focus should shift from the pace of hikes to the peak of the cycle, which several governors suggested could be well above 5%, and to the horizon on which restrictive monetary policy will be applied.
•          Asian risk sentiment is vibrant this morning with China (+1.5%) and Hong Kong (+4%) outperforming. The Biden-Xi Summit in the sidelines of the G20 meeting in Bali is welcomed as a new starting point to stop the tumbling of bilateral ties and stabilize the relationship. Recent actions to weaken the zero-Covid policy guidelines and support the real estate sector are still at play as well. Slightly weaker-than-expected monthly Chinese eco data are this morning interpreted according to the “bad news is good news” paradigm, raising the stakes of more fiscal stimulus. Retail sales fell 0.5% Y/Y to be up only 0.6% YTD YoY. Industrial production weakened to 5% Y/Y to be up 4% YTD YoY. Investments stabilize at 5.8% YTD YoY. Property investment contracted 8.8% in the period.
•          Today’s eco calendar contains November German ZEW investor sentiment, 2nd reading of EMU Q3 GDP data, October US PPI figures, November Empire Manufacturing Survey and speeches by several ECB and Fed members. We don’t expect them to change current market dynamics. The latest UK labour market report is just out and broadly in line with forecasts. Wages continued to grow at a 6% Y/Y pace with the unemployment rate ticking up marginally to 3.6% in Q3. Employment fell by 52k in Q3 compared to Q2, but monthly data for October showed a stronger then expected 74k increase. Sterling gained a few pips with EUR/GBP trading at 0.8760.

News Headlines

•          According to reporting of the Belgian Financial newspaper ‘De Tijd’, the final documents submitted to the Belgian Parliament show a bigger Belgian budget deficit compared to the drafts that were proposed to the European Commission a month ago. The structural deficit of the federal government is now estimated at 3.4% of GDP, compared to 2.9%. The global Belgian deficit has been raised to 6.1% of GDP (€35bn) compared to 5.8% of the GDP presented earlier. The review is said to be due to uncertainty on the timing of the reform of some excise duties which have to be put in place to counterbalance for a lowering the VAT on energy products. Due the higher budget deficit, the Belgian debt to GDP ratio now is estimated at 109.4% of GDP compared to 108% expected earlier.
•          The weaking of the yen for now apparently isn’t a support for the Japanese economy. Japanese GDP growth in the third quarter unexpectedly contracted by 0.3% Q/Q. This compared to expectations for a 0.3% quarterly growth and a rise of 1.1% Q/Q in the second quarter. Private consumption slowed to 0.3% Q/Q from 1.2% Q/Q as did fixed capital investment (1.2% Q/Q from 4.8%). Net exports subtracted 0.7% from growth as exports rose only 1.9% while imports gained 5.2%. Via different channels, the weak yen is weighing on domestic purchasing power and hampering growth. The yen weakened again slightly this morning to trade near USD/JPY 140.40. However, this move is at least partially supported by a (modest) USD comeback overall.


The ECB ended net asset purchases and lifted rates by a combined 200 bps since the July meeting. More tightening is underway but the ECB refrained from guiding markets on the size of future hikes. Germany’s 10-yr yield rose to its highest level since 2011 (2.5%) before a correction kicked in. Losing the neckline of the double top formation at 1.95% calls for a return towards the 1.82%/1.77% support zone

The Fed policy rate entered restrictive territory, but the central bank’s job isn’t done yet. The policy rate is expected to peak above 5% early next year and remain above a neutral 2.5% over the policy horizon. A below consensus CPI print strengthened some Fed members call to slow down the pace of the tightening cycle, triggering a strong correction. The neckline of the double top formation at 3.91% is under test.

USD for the largest part of this year profited from rising US (real) yields in a persistent risk-off context. Geopolitical and European recessionary risks kept EUR in the defensive even as the ECB finally embraced on a tightening cycle. EUR/USD left the strong downward trend channel since February. The current correction on bond markets weighs on USD. KEY resistance stands at 1.0350.

The UK government had to backtrack on its lavish fiscal spending plans which sent sterling initially tumbling towards the EUR/GBP 0.90+ area. Yawning twin deficits and rising risk premia will continue to weigh on the UK currency longer term. The Bank of England stepped up its tightening with a 75 bps rate hike, but warned simultaneously that UK money market expectations about peak cycle are way too aggressive.

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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