Wednesday, 16 March 2022
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Markets

•          US stock markets had a better run yesterday with main indices closing up to 3% higher. Support in the Nasdaq at 12552 (38% retracement on 2020-2021 post-Covid-rally) held for a second time, but the technical picture obviously doesn’t improve yet. We hold our view that 2022 will be tough year for riskier assets as they’ll have to stomach a hawkish Fed in reaction to/on top of surging costs. Core bonds stabilized/recovered somewhat after this month’s heavy beating with some investors locking in profits ahead of tonight’s verdict. Daily changes on the US yield curve range between -1.1 bp (2-yr) and +1.1 bp (10-yr). The German yield curve bull flattened with yields sliding 7.2 bps (2-yr) to 1.9 bps (30-yr). The euro didn’t really mind the relative loss of interest rate support with EUR/USD and EUR/GBP closing broadly flat at respectively 1.0956 and 0.8399.
 
•          The Fed will start its interest rate tightening cycle tonight by delivering a 25 bps rate hike. Some Fed governors suggested a 50 bps inaugural move, but Fed Chair Powell earlier this month told lawmakers that uncertainty and market volatility related to the Russian invasion in Ukraine meant that the US central bank shouldn’t become a source of additional market stress. He nevertheless suggested that >25 bps steps could be a possibility later in the cycle if warranted by inflation (expectations) and/or the tight US labour market. The new Summary of Economic Projections is expected to show yet another upgrade to inflation forecasts but focus will turn to governors thoughts on the future interest rate path (dot plot). Markets currently discount the equivalent of 25 bps rate hikes at every remaining Fed meeting this year (7 including today). We think that the Fed will show readiness to more or less walk that line. Apart from this year’s projections, the key question will be on where Fed governors see the terminal rate. The market currently discount a neutral top just under 2.5% at the end of 2023. Will the Fed be more hawkish in this respect by signaling readiness to apply a restrictive monetary policy stance (exceeding the 2.5% neutral rate)? Apart from the guidance on interest rates, there’s the second important pillar of the Fed’s normalization plans: running down the balance sheet. The US central bank indicated that this process would start shortly after raising interest rates, but provided little intel on the pace and target of the current $9tn balance sheet. We think the Fed could delay any such detailed plans for its May or June meeting, in line with Powell’s guidance not to become a source of additional market stress. From a market point of view, we don’t expect any significant correction yet in core bond sell-off. If the focus turns to interest rates rather than the BS run-off, this implies a further bear flattening of the curve. While the European central bank last week finally gave some backing for the euro medium term, we think the dollar can take the upper hand short term. Because of a hawkish Fed, fragile risk sentiment and ongoing tensions in Ukraine. The YTD low at EUR/USD 1.0806 is the final reference ahead of the March 2020 low (1.0636).

News Headlines

•          Sarah Bloom Raskin withdrew as President Biden’s nominee to be the Fed’s vice chair of supervision yesterday. She faced stiff Republican opposition ever since her nomination in January. But Raskin’s chances for what is seen as the most powerful banking regulator post really diminished significantly after Senator Manchin from the Democratic Party announced he wouldn’t support her in the 50-50 split Senate. Biden hasn’t come up with an alternative candidate yet. The post may even remain open heading into the US midterm elections in November.
 
•          Australian house prices rose 4.7% q/q in the last quarter of 2021. That’s slightly down from the 5% the quarter before but more than the 3.5% expected. The year-on-year rise hit a new record with 23.70% (up from 21.70% in Q3) since recording began in 2003. From the eight capital cities, Brisbane (9.6% q/q) and Adelaide (6.8%) registered the biggest increases. “Days on market fell and sales transaction volumes increased”, the statistics bureau said, referring to record low interest rates and ongoing strong demand to have supported growth in property prices.

Graphs

European yields recovered from the setback by the Russian-Ukrainian war. It will slow down growth but didn’t deter the ECB from formally stepping up the normalization plans. QE is to end in Q3 with a rate hike in the next quarter. Real yields may further bottom out while inflation expectations may ease but will probably remain elevated. Next resistance stands at 0.58%.

Fed talk since the geopolitical escalation suggests policy normalization to fight consistently high inflation won’t be delayed. Real yields declined but avoided new record lows. Spiraling energy prices put inflation expectations on an upward path in the US too (>3%). The US 10-yr yield is currently breaking above 62% retracement (2.13%) on the 2018-2020 decline.

EUR/USD tested the 1.08 pandemic support zone but survived. A subsequent short squeeze propelled the pair then back to 1.10. The ECB sticking to – accelerating even – the normalization schedule is a (latent) positive for the common currency. It protects EUR/USD’s downside in the medium term. Short term developments (Fed, Ukraine) tend to favour the dollar. EUR/USD 1.0806 is the final reference ahead of the 2020 low (1.0636).

Sterling proves no longer resilient to the uncertain risk environment. Combined with new-found euro vigor, EUR/GBP took out the first resistances between 0.82 and 0.83. A return above 0.845/72 would bring the pair back in the sideways trading range that dominated 2021. Regarding monetary policy, the balance after the March ECB meeting turned more even.

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).
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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