Wednesday, 16 February 2022
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•          News on the geopolitical front trumped second tier data as the dominant trading factor yesterday. Russian president Putin indicated he is still open for a diplomatic solution. He announced several thousands of troops that were amassed near the Ukrainian border would return to base. While parties involved, including NATO, remained cautious, stock markets yesterday went full force. European equities bounced up to 2%, Wall Street finished more than 2.5% (Nasdaq) higher. Yield curves bear steepened. US yields added 0.2 bps to 7.2 bps (30y) with the 10y tenor closing north of 2% again. German yields rose 1.6 bps (2y) over 2.5 bps (10y) to 5.6 (30y). Both the 10y and 30y hit new cycle highs with the latter piercing through the 0.50% resistance area (March/May19 interim low, May21 previous recovery high). ECB’s Villeroy delivered a first concrete timeline for policy normalization this year, saying APP bond buying could end in Q3. Reductions could follow a bi-monthly or even monthly pace instead of a quarterly one. The French governor did suggest there could be more time between ending net bond buying and a first rate hike by adjusting current forward guidance. His comments came after the European close thus left no traces on cash trading. We do note some Bund weakness going into early European dealings today. US yields leave intraday lows behind as well. Asian-Pacific stocks take comfort from yesterday’s WS performance. Japan (+2.3%) outperforms. EUR/USD eked out a gain from the low 1.13 to 1.136 and sticks near those closing levels this morning. Safe haven currencies including JPY and CHF lose out (marginally) for a second day. EUR/GBP followed the road paved by EUR/USD. The pair ventured into the high 0.83(8) area yesterday and doesn’t go very far away this morning even as UK January CPI came in slightly higher than expected. Headline inflation accelerated to 5.5%, core inflation sped up to 4.4%.

•          Having had Chinese (see below) and UK price data, focus turns to US retail sales and the Fed meeting minutes. The former are expected at a solid 2% for the headline series in January and 1.2% for the most narrow gauge. Impact on markets may be limited ahead of the minutes though. Fed chair Powell was very clear at the last policy gathering about starting policy normalization and doing it at a faster pace than previously. Markets will look for clues on a potential 50 bps kickstart in March. Hints about the pace of the balance sheet roll-off would be welcomed since the Fed remained pretty vague on that last time. We’re keen to see whether it will suffice to keep core bond/US yields on track. Some short-term range trading could be in store with the occasional geopolitical headlines still causing some volatility. We look out for the US 10y yield to hold the 2% today and for the remainder of the week. Provided that sentiment doesn’t derail, EUR/USD may continue recovering. 1.1386 is a first resistance.

News Headlines

•          Prices pressures in China continued to ease in January. Chinese PPI eased from 10.3% to 9.1%, faster than analysists had expected and the slowest pace since July. According to comments from the NBS, prices of coal, steel and other industrial products eased. At least now, higher producer prices hardly translate in higher CPI consumer prices. CPI inflation printed at 0.4% M/M to be up 0.9% Y/Y (down from 1.5% Y/Y in December). Non-food prices rose 2.0% Y/Y. Food prices even declined 3.8% Y/Y, mainly due to a sharp drop in pork prices. Soft inflationary pressures give the PBOC the room to maintain a supportive monetary policy stance with room for further (targeted) easing. This was confirmed by PBOC governor YI Gang even as he expects the economy to return to potential growth this year. The expected monetary policy support for now doesn’t hurt the yuan. The currency maintains this week’s rebound trading near USD/CNY 6.3390.

•          January labour market data in South Korean printed really strong. The unemployment rate declined faster than expected from 3.8% to 3.6%. The economy added 1 135 000 jobs on a non-seasonally adjusted basis compared to the same period last year, the fastest growth since March 2000. Growth was also supported by strong fiscal support. Jobs were mostly added in healthcare and social services and services like accommodation and restaurants. However, other sectors (wholesale and retail) continue to suffer from measures to contain rising Covid-19 cases.


Long term EU bond yields surged after the ECB hinted it may stop net bond buying sooner than previously expected amid high and even accelerating inflation. The move was driven by higher real rates. The break into positive territory has been confirmed. The German 10-y yield also cleared 0.15% resistance (61.8% 2018-2020 retracement), with 0.40% being the next reference.

The US 10-yr yield took out the October top at 1.7%. The January CPI release triggered a first brief return above 2%. The Fed’s hawkish policy turn triggered a surge in real yields. A 50 bps March rate hike is the most likely scenario. Core bonds and stocks to sell-off in lockstep again?

The ECB changed its tone dramatically. Views on temporary inflation have changed. Net bond buying is poised to end sooner, allowing for a first rate hike later this year. EUR/USD left the lows behind. However, the sharp rise in US yields caps a break beyond 1.15. Some further USD comeback is likely, but we don’t expect a return to the 1.1121 correction low.

The BoE hiked its policy rate to 0.5% in February with the biggest possible minority even voting for a 50 bps increase. Further tightening is in the pipeline. The odds have turned in favour of EUR/GBP with quite some BoE rate hikes already discounted and the ECB having started the U-turn. The pair tested 0.8282 support but rebounded quickly. The 0.85 big figure is both technically and symbolically important.

Calendar & Table

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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.
It has not been assessed as to whether or not these insights would be suitable for any particular investor.
Opinions expressed are our current opinions as of the date appearing on this material only and can be opposite to previous recommendations due to changed market conditions.
The authors of this recommendation do not warrant the accuracy, completeness or value (commercial or otherwise) of any recommendation. Neither are the authors liable to those who receive these recommendations for the content of it or for any loss or damage arising (whether in tort (including negligence), breach of contract, breach of statutory duty or otherwise) from any actions or omissions of the authors in reliance on any recommendation, or for any claim whatsoever in respect of the content of, or information contained in, any recommendation. Any opinions expressed herein reflect the judgement at the time the investment recommendation was prepared and are subject to change without notice.
Given the nature of this advice (linked to currencies and interest rates) , the advice is overall not specific in nature.   As such there is no reference to any corporate finance contract and as such there is no 12 month overview based on the different advices.
This document is only valid during a very  limited period of time, due to rapidly changing market conditions.

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