There will be no KBC Sunset Market Commentary 16/12/2022 via Trader Talent tonight and no KBC Economics-Markets reports from Monday December 19, 2022 until Monday January 2, 2023. We resume our publications on Tuesday January 3.
KBC Economics-Markets wishes you a Merry Christmas and a happy New Year.
• The ECB delivered a 50 bps hawkish-to-the-bone rate hike yesterday. More than a third of ECB governors wanted a third 75 bps move, Bloomberg reported. To get the hawks on board, the ECB’s communication was very aggressive. Rates “will still have to rise significantly at a steady pace” the statement said. President Lagarde explained this meant that 50 bps is the standard “for some period”. In addition, the balance sheet roll-off (APP) will start at the beginning of March, at a (cautious) monthly $15bn. Lagarde stopped short of calling markets outright wrong and stuck to a more elegant “The ECB needs to do more than markets price” (terminal rate then less than 3%). Ceci n’est pas un pivot and complacent markets were shoved it in the face. German yields rallied 14.3 bps (10y) to 25.4 bps (2y) higher and from a technical perspective call off the immediate downside alert. Swap yields jumped between 11.9 and 18.5 bps. Peripheral yield spreads rose brutally in Italy (+16 bps). European rate action failed to inspire the US though. The front still added up to 3.3 bps but the longer end slipped about 4 bps following disappointing US data across the board (Empire manufacturing, Philly Fed outlook, retail sales, industrial production). Hawkish ECB language reverberated through European (-3.5%, Stoxx50) and US equities (-3.2%, Nasdaq). This risk-off cut the euro rebound against the dollar short – but not against most other G10 peers. EUR/USD retreated from a 1.0735 intraday high to close at 1.0628. The dollar flourished, with DXY rising back above 104. Sterling got a double whammy from the risk climate and the BoE. Growing internal division and cloudy (sometimes simply confusing) communication trumped a 50 bps interest rate support (with more to come). EUR/GBP rebounded from 0.86 to 0.8727, calling an end to the multiple tests of the 0.8567 critical support area.
• After the monetary heydays it’s back to economic data with the all-important European PMI’s. In November they showed tentative signs of bottoming, be it still below neutral levels. But that came as a positive surprise nevertheless. The bar for today is set at a status quo. There may be some room for another upside beat with the general trend of confidence bottoming out to continue. The first real winter stress test from this week probably hasn’t filtered through in the survey yet. Either way, we’ll be looking for European yields to extend yesterday’s dramatic surge going into the weekend. A weekly close in the European 10y swap yield above the June high (2.72%) would be a nice-to-have. Germany’s 10y yield should take out the 50% recovery level of the Oct-Dec correction (2.136%). Next resistance in EUR/USD is located at 1.0787 but that requires a neutral equity sentiment at minimum.
• Slovak PM Heger’s minority government yesterday lost a vote of no confidence by 78 votes to 72. Heger turned PM last year after swapping portfolios with previous PM Matovic who had to take a step back over the purchase of Russian Covid vaccines. This Summer, junior coalition partner SaS demanded Matovic’ resignation as Finance Minister over what legislation the government should adopt in the battle against safeguarding disposable incomes. Heger refused to scupper his party member after which SaS exited the coalition. A last-minute offer to eventually sack Matovic came too late with Heger thus losing the vote of no confidence. Slovak president Caputova now has to decide whether Heger can continue as caretaker PM or appoint another political leader with the aim of avoiding snap elections. The next Slovak parliamentary vote is scheduled in early 2024.
• The Danish central bank (Nationalbank) raised its current account rate from 1.25% to 1.75%, matching the ECB’s rate hike earlier on the day in order. The Danish krone trades on the strong side around parity against the euro (EUR/DKK 7.4375 area vs 7.46038) which triggered FX intervention selling van het Nationalbank. Some therefore expected that the central bank would no longer follow the ECB’s tightening pace 1:1 (as it did in October) even as the Danish Nationalbank has its own inflation issues to tackle.
The ECB lifted rates by a cumulative 250 bps since the July meeting. The slower 50 bps December-pace will be the norm “for a period of time” and will be complemented by QT from March on. The hawkish ECB shocked complacent markets. Germany’s 10-yr yield recouped the neckline of the double top formation at 1.95%, calling off the ST downside momentum. The 50% recovery of the Oct-Nov correction serves as first resistance (2.136%).
The Fed policy rate is expected to peak above 5% early 2023 and remain above neutral over the policy horizon. The December Fed dot plot confirms our view but markets aren’t buying it. After a 50 bps in December, they expect one last 25 bps move next year. Recession fears dominate. The move below the neckline of the double top formation at 3.91% gave more downside potential towards the June top (3.5%) and 50% retracement (3.42%).
USD for the largest part of this year profited from rising US (real) yields in a risk-off context. EUR/USD left the downward trend channel following a sharp bond, FX and equity turnaround in recent weeks. ST resistance levels are situated at 1.0747/1.0806. We hold the view that the yield correction lower isn’t sustainable (eg. post ECB reaction) and expect the dominant 2022 dollar trend to return eventually.
The UK government ditched lavish fiscal spending plans which triggered a sell-off across British assets. Yawning twin deficits and elevated risk premia will continue to weigh on the UK currency longer term. The Bank of England raised rates by 50 bps with more hikes likely. But growing internal division, cloudy communication and the return of risk-off undermine this interest rate support for the pound. EUR/GBP rebounded from key support at 0.8559/67.
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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