Wednesday, 17 August 2022
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•          Yesterday’s eco numbers (German ZEW investor sentiment, US housing numbers) played no role of intraday importance across markets. The main intraday move on bond markets occurred around the start of US trading hours. Bonds sold off following earnings by retailers Wall Mart and Home Depot. Both managed to beat expectations, though we must add that the former downplayed its guidance last month. Nevertheless, the results gave investors some courage that worst recession nightmares might be off the table as the (US) consumer holds stronger than feared. The proof of the pudding could be in today’s July US retail sales numbers. A second-session straight (late) swoon of oil prices (Brent fell from $96 to $92/b) failed to improve the intraday odds for core bonds. The US yield curve turned more inverse with daily yield changes ranging between -1.2 bps (30-yr) to +9.1 bps (3-yr). The German yield curve bear steepened with yields adding 4.6 bps (2-yr) to 7.5 bps (30-yr). From a technical point of view, the German 10-yr yield tested the psychologic 1% barrier, which coincides with last week’s high and with the topside of the downward corrective trend channel since mid-June. A break higher would be significant and call an end to that correction, making way for a further increase towards the 1.12% area. Stock markets continued their comeback higher after escaping from downward trend channels end July/early August. Main indices gained around 0.5% both in Europe and in the US. Ironically, a weak growth scenario (which eventually ends policy normalization cycles) does the trick. From a risk perspective, it beats the alternative of prolonged central bank tightening/inflation fighting. The US dollar failed to profit from yesterday’s relative yield dynamics. The trade-weighted greenback closed near unchanged at 106.50 with EUR/USD even winning some pips, closing at 1.0171 from an open at 1.0161.
•          Today’s eco data include this mornings Japanese trade numbers and UK inflation figures. Later today we’ll see the second reading of Q2 EMU GDP, US retail sales (see above) and Minutes of the previous FOMC meeting. Japan’s trade deficit hit a record high in July on surging imports. High commodities prices and a weak yen added to this. UK inflation once more exceeded consensus in July. The monthly dynamic remains strong at 0.6% M/M with the Y/Y figure accelerating from 9.4% to 10.1%, exceeding consensus (9.8%) and hitting double digits for the first time since 1982. Core inflation accelerated from 5.8% Y/Y to 6.2% Y/Y. Sterling spikes higher on the numbers as it strengthens the case for the Bank of England to hang on to its increased tightening pace. Governor Bailey and co in August pushed through a first 50 bps rate hike following 5 smaller steps (+25 bps) before. EUR/GBP trades below 0.84.

News Headlines

•          The Reserve Bank of New Zealand extended its tightening cycle this morning by lifting the policy rate by 50 bps, from 2.5% to 3%, the highest level since July 2015. It’s the fourth consecutive 50 bps rate hike, following three smaller 25 bps steps (inaugural move October 2021). In its new projections, the Monetary Policy Council (MPC) pencils in a more aggressive tightening path than in May. The policy rate is now forecast to peak just above 4% early next year and will only come down from 2025 onwards. More tightening “at pace” is necessary as the MPC judges core consumer inflation remains too high while labour resources remain scarce. Updated inflation forecast show a slowdown from the current 7.3% to 5.8% by the end of 2022 (5.5% forecast in May), to 3.8% by the end of 2023 and below the midpoint of the 1%-3% target range by mid-2024. Annual average projected growth in the year through March 2023 stands at 2.8%, before slowing to 0.8% in the year through March 2024 (from 1.3% in May). The kiwi dollar ticked higher on the decision, but fails to really build on this move. NZD/USD currently changes hands at 0.6360. The kiwi dollar swap curve is broadly unchanged, with yields up to 1.5 bps higher across the curve.


The ECB ended net asset purchases and lifted rates with a 50 bps inaugural hike. More tightening is underway but the ECB refrained from guiding markets on the size of future hikes. Economic indicators however show growth is stalling or even contracting. Markets doubt whether tightening may last in 2023. Germany’s 10-yr yield extended a correction lower until 0.67% (62% retracement on March/June move) before consolidating.

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 will hit max speed by September. But markets question the Fed’s hawkish intentions following a string of weak data. Yields are under pressure. The 10y briefly dropped below the lower bound (2.70% area) of the sideways trading range.

The euro zone’s (energy) crisis is being accompanied by an Italian political crisis. Growing recession fears hammered EUR/USD below the 2017 low of 1.0341. Parity was tested before a technical (USD-driven) correction higher kicked in. A tactical dollar pause is at hand but the euro remains strategically under pressure. It takes a return above EUR/USD 1.035 to call off the immediate downside alert.

Sterling’s strong run going into the BoE meeting of August abruptly ended. The central bank hiked by 50 bps. More hikes are likely given stellar inflation, but have been priced in already. Combined with the BoE’s grim economic assessment it triggered a profit-taking move with short-term EUR/GBP upside potential to 0.8512. Euro weakness remains a risk acting as an opposing force

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). Read the full disclaimer.

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