Thursday, 17 November 2022
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Markets

•          EUR/USD didn’t revisit Tuesday’s high yesterday as an early attempt to regain traction was blocked by stronger US retail sales and by ECB comments. The pair eventually closed below 1.04 and is trading there still. Initial optimism came from NATO and international comments suggesting that the missile on Polish territory was an unfortunate accident from Ukrainian air defense systems, nevertheless sparked by Russian missile attacks against the country. Better US retail sales were later erased by an unexpectedly steep drop in US homebuilder sentiment (see below). Dovish comments of Bank of France Villeroy were later echoed in a more general Bloomberg article. People close to the matter suggested that there’s a lack of momentum at the moment within the ECB to push for another 75 bps rate hike in December. Everything seems to be boiling down to the November inflation figure which will be released on Nov 30. It is extremely relevant both as an indicator of price pressure and as a number to feed into quarterly forecasts. Another upward surprise seems necessary to keep the 75 bps hiking pace going. Reasons to slow it down to 50 bps include mounting recession risks, the arrival at a neutral deposit rate of 2% and the near start of the balance sheet reduction via partly halting APP redemptions.
 
•          Core bonds extended their good run of late with US yields ceding up to 12.2 bps at the very long end of the curve and rising by 1.6 bps at the front end. US yields lost necklines of double top formations at tenors from 3y onwards earlier this week. The US 10-yr yield drop below 3.9% took it in no time to 3.7% currently with strong support arriving at 3.64% (38% retracement on August/October upleg) and 3.5% (previous cycle high in June). The final target of the double top formation stands in the same zone (3.47%). We believe this is the maximum potential of the current correction lower in US yields. Afterwards, we stick with more sideways action ahead of the mid-December policy meetings by central banks with new real upward yield potential only arriving early January, after the traditional low-volume Christmas period. The German yield curve bull flattened with yields 7.3 bps (2-yr) to 11.5 bps (30-yr) lower. The German 10-yr yield closed just below 2%. First support stands at 1.95% (end of October low) with 38% retracement on the August/October rise at 1.82% and the October low of 1.77% the key levels to watch. The forward view is similar as for US Treasuries. Today’s eco calendar contains more US housing data, Philly Fed Business Outlook and weekly jobless claims. UK Chancellor Hunt in his Autumn Statement will present long-term Budget plans. Speeches by central bank governors remain wildcards.

News Headlines

•          The Australian labour market posted an unexpectedly strong performance in October. Employment growth rose by 32.200, compared to a modest decline of 3;800 in September. Markets only expected a rise of about 15 000. The rise was fully driven by a 47.100 jump in full employment. Total hours worked rose a strong 2.3%. The unemployment rate eased from 3.5% to 3.4%, a cycle low and the lowest level since 1974. The participation rate was unchanged at 66.5%. Yesterday, Australian Q3 wage growth data also surprised on the upside off expectations at 1.0% Q/Q and 3.1% Y/Y. A persistent strong labour market questions speculation of late that the Reserve Bank of Australia might be nearing the end of its rate hike cycle . The RBA recently indicated that already quite some tightening has been put in place that takes to filter through into the economy. Even after today’s data markets still only see about a 75% chance of an additional 25 bps rate hike at the early December RBA meeting. The 2-y Government bond yield temporary rebounded but still trades about 6 bps lower in a daily perspective. The Aussie dollar doesn’t profit, trading near AUD/USD 0.6720.
 
•          The NAHB index in sentiment among US homebuilders yesterday showed a larger than expected deterioration declining from 38 to 33. The index reached the lowest levels since mid-2012, disregarding the bottom at the start of the corona crisis in 2020. According the tot NAHB statement, “higher interest rates have significantly weakened demand for new homes as buyer traffic is becoming increasingly scarce”. The decline was visible both in the subseries for current and future single family home sales as well as in expected buyers traffic.

Graphs

The ECB ended net asset purchases and lifted rates by a combined 200 bps since the July meeting. More tightening is underway but the ECB refrained from guiding markets on the size of future hikes. Germany’s 10-yr yield rose to its highest level since 2011 (2.5%) before a correction kicked in. Losing the neckline of the double top formation at 1.95% calls for a return towards the 1.82%/1.77% support zone

The Fed policy rate entered restrictive territory, but the central bank’s job isn’t done yet. The policy rate is expected to peak above 5% early next year and remain above a neutral 2.5% over the policy horizon. A below consensus CPI print strengthened some Fed members call to slow down the pace of the tightening cycle, triggering a strong correction. The move below the neckline of the double top formation at 3.91% suggests more downside potential.

USD for the largest part of this year profited from rising US (real) yields in a persistent risk-off context. Geopolitical and European recessionary risks kept EUR in the defensive even as the ECB finally embraced on a tightening cycle. EUR/USD left the strong downward trend channel since February. The current correction on bond markets weighs on USD. KEY resistance at 1.0341/50/68 risks giving away.

The UK government had to backtrack on its lavish fiscal spending plans which sent sterling initially tumbling towards the EUR/GBP 0.90+ area. Yawning twin deficits and rising risk premia will continue to weigh on the UK currency longer term. The Bank of England stepped up its tightening with a 75 bps rate hike, but warned simultaneously that UK money market expectations about peak cycle are way too aggressive.

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). Read the full disclaimer.

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