Thursday, 17 February 2022
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•          FOMC Minutes offered little additional flavour to what’s commonly known. The Fed will implement a first rate hike soon and participants agreed that “if inflation does not move down as they expect, it would be appropriate for the committee to remove policy accommodation at a faster pace than they currently anticipate”. Since that January FOMC meeting, we’ve received accelerating inflation numbers and a stellar payrolls report. Markets already reacted accordingly by positioning themselves way more aggressively. This includes a cumulative 150 bps rate hikes this year with the investment community split on the magnitude of the first one: 25 bps or 50 bps. Minutes provided no details on this specific issue, nor on the timing/pace of the balance sheet reduction. The front end of the US yield curve outperformed in the wake of the Minutes. The long end steadied after failing to react to stronger US retail sales earlier on the day. Both strengthen our call that we are up for a period of consolidation/correction in core bonds, especially as long as risk sentiment remains fragile. Next key eco updates in EMU and US are only due early March. The US yield curve bull steepened yesterday with yields dropping by 5.6 bps (2-yr) to 0.4 bps (10-yr). German yields lost 1.5 bps to 3.3 bps across the curve with the belly outperforming the wings. 10-yr yield spreads changes vs Germany barely moved. Greek bonds didn’t respond to comments from an ECB spokesperson who said that the eligibility of Greek bonds for refinancing tools will be reviewed in due course before their expiry in June 2022. Rumours suggested that the ECB was working to extend the measure until 2024. Greece itself hopes regaining its investment grade status next year, making the exemption no longer needed. EUR/USD kept its slightly upward bias yesterday, closing at 1.1373 from an 1.1359 open. EUR/GBP closed at 0.8372 compared with an 0.839 open. Sterling didn’t respond to high, but more or less in line, January inflation data. 
•          Risk sentiment/geopolitics dominates Asian dealings this morning. Luhansk separatists claim a Ukrainian violation of cease-fire rules while doubt lingers on the alleged Russian troop pullback. Japanese stock markets underperform regional peers, sliding up to 0.8%. Core bonds profit. Today’s eco calendar contains US housing data, weekly jobless claims and Philly Fed business outlook. We don’t expect them to guide trading. A speech by ECB chief economist Lane could be the highlight after heavyweights Schnabel (cannot ignore house price surge in inflation) and Villeroy (bond buying could end in Q3) shifted towards a more aggressive inflation stance earlier this week. Such move from the uber-dove would be highly significant. Apart from Lane, all eyes will be on the fragile risk climate.

News Headlines

•          The Australian labour market in January resisted the spreading Omicron-variant rather well. The economy added 12 900 jobs versus expectations for an unchanged figure. The unemployment rate (4.2%) held unchanged near the lowest level since 2008. The participation rate rose slightly from 66.1% to 66.2%. Consequences of the omicron wave were visible in a 8.8% decline in the hours worked. As this effect is expected to be temporary, the odds are good for a further recovery of the labour market. The RBA has made a further improvement in the labour market, and especially a rise in wages, as key to start raising rates. Today’s data probably won’t change the RBA’s assessment in a profound way. The 2-yr (-5 bps) and the 10-yr Australian yield (-2.5 bps) this morning eased slightly, but this was mainly due to broader market move (tentative risk-off). Still market pricing slightly lowered the probability of an RBA June rate hike to about 50%. The Aussie dollar eases to trade at 0.7185.
•          Japan in January recorded an unadjusted monthly trade deficit of JPY 2 191bn, the biggest since January 2014. Exports growth unexpectedly slowed from 17.5% Y/Y to 8.6% Y/Y. The monthly rise in exports (SA) almost came to a standstill as the persistent impact of omicron and supply issues are slowing foreign sales. At the same time, the value of imports continued to rise at double digit numbers (39.6% Y/Y), reaching the highest amount on record ( JPY 8 523bn) due to higher costs of energy products.


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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