Friday, 16 September 2022
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•          Curve flattening/inversion remained the ‘by default’ option on EMU and US interest rate markets. Both EMU and US 2-y yields touched multi-year highs as markets assume that the Fed and the ECB have no choice but to continue their front-loading game. At the same time, US markets don’t completely give up the idea that there is a case for the Fed to contemplate cutting the rates by end of next year. It’s unlikely that the Fed will support that idea. US data were mixed. Retail sales grew modestly in August. July sales were downwardly revised. Weekly jobless claims (213k) remain low and suggest demand for labour remains solid. If the Fed wants to tame inflation via a moderation in demand, there is still some work to do. US yields rose between 6.6 bps (2-y) and 0.8 bps (30-y). The move was again fully the result of a higher real yield (10-y +8.6 bps to 1.02%). EMU (swap) yields rose 1.3 bps (10-y) to 9.2 bps (2-y). The 30-y measure eased slightly (-1.5 bps). The EMU two year yield surpassed the 2011 peak closing north of 2.50%. ECB policy makers (except for Portuguese member Centeno) all admitted that decisive action is needed to bring inflation and inflation expectations back to more acceptable levels, supporting the ruling market trend. A persistent rise in real yields with CB’s tightening at risk of pushing the economy into recession (Cfr World Bank infra) is keeping equities in the defensive. US indices again lost up to 1.43% (Nasdaq). Both the S&P and the Nasdaq are at risk of slipping below last technical support (at 3809 and 11545 respectively) which, if so, would open the way for a return to the June lows. The dollar remains strong (DXY close 109.74) but for now fails to force a new break higher. Markets pondering the chances of interventions in the likes of Japan and SK and EMU interest rates at least following (or even exceeding) moves in the US for now results in some kind short term (fragile) equilibrium. EUR/USD even closed marginally stronger at parity.
•          This morning, Asian equites remain under pressure losing op to 1.0%/1.5%. Chinese August eco data including production, retails sales and unemployment all printed better than expected, but didn’t help to change investors’ mood. The yuan weakens further north of USD/CNY 7.0. USD/JPY is trading little changed near 143.4. US yields are still drifting higher. Later today, the final EMU August inflation and US consumer confidence of the University of Michigan probably take center stage. Final CPI data usually are no market mover, but an upward revision (if any) might only reinforce the rise in short-term yields. In the Michigan consumer confidence survey, the market focus shifted from the activity-related subseries to inflation expectations. The later are expected to confirm recent topping pattern. Even so, we don’t expect it the really affect pre-Fed market positioning in a profound way. The dollar for now is holding a consolidation pattern, but recent/cycle highs stay within reach.

News Headlines

•          South Korea is reviewing contingency plans to stabilize the South Korean won. USD/KRW tested a 13-year high (low for the won) at 1400 in Asian dealings this morning. At the start of the year, the SK currency was trading below 1200. Finance minister Choo Kyung-ho joined peers in Japan in stepping up verbal interventions. He told parliament that the ministry is closely monitoring the market situation and said authorities would take measures if necessary. The Bank of Kora recently warned that the won’s fall has been too fast relative to economic fundamentals. The central bank raised rates by 25 bps to 2.5% in August and signaled more tightening. However, the aggressive US Fed path still favours the dollar over the won with the former also under pressure from ballooning/record trade deficits amid surging energy and commodity prices.

•          The World Bank warned for a “devastating” recession next year as central banks raise rates at a speed not seen in decades. It called on monetary authorities in big economies to coordinate their actions in order to reduce the overall amount of tightening. At the same time, more action is needed to boost production to ease price pressures rather than all the focus being on curbing spending. The World Bank said core inflation was still likely to run above 5% next year, adding that if this persuaded central banks to become even more aggressive, global economic growth would drop to just 0.5% in 2023.


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


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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.
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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). Read the full disclaimer.

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