Friday, 18 February 2022
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•          In case you haven’t noticed it yet, the ECB is in full swing towards policy normalization. ECB President Lagarde acknowledged upward inflation risks at the previous ECB meeting. Executive board member Schnabel made a plea to take higher costs of home ownership into consideration when assessing inflation. For Q3 2021, she calculated that it would have added 0.6 ppt to core inflation (1.4%). Banque de France governor Villeroy doesn’t want Frankfurt’s hands to be tied for too long and calls net asset purchases to end in Q3. ECB chief economist Lane completed the U-turn on inflation at an MNI Market News webcast yesterday. He said that it is unlikely that inflation will drop below 2% in the next two years. That’s a big head’s up to the new March inflation projections which will thus show an upgrade of the 1.8% figure for 2023 and that way warrant a different path going forward in terms of asset purchases. Lane did try to make a little nuance. He thinks that inflation will settle around the 2% target in the medium-term, which permits a gradual normalization of policy, i.e. winding down net asset purchases and getting rid of negative policy rates. For the ECB to really engage on a tightening cycle, Lane argues that there needs to be a threat that inflation will persist significantly above 2% over the medium term. Money markets currently discount the latter scenario with a return to zero by the end of the year and a projected policy rate peak between 0.75% and 1% by the end of 2024. Our own scenario currently takes into account a 0.75% policy rate by the end of 2023.
•          Markets didn’t react to the symbolic Lane comments. General trends remained at play. Simply put: a fragile risk sentiment on stock markets, correcting core bonds and numbed FX markets. Main European equity indices lost up to 1% yesterday with US losses reaching up to 2.9% for Nasdaq. US yields lost 5.2 bps to 8.4 bps with the belly of the curve outperforming the wings. The German yield curve bull steepened with yields sliding by 3.3 bps (30-yr) to 6.6 bps (2-yr). 10-yr yield spread changes vs Germany narrowed by up to 3 bps. EUR/USD closed at 1.1361 from an 1.1373 open. Sterling continued its recent outperformance ending below EUR/GBP 0.84 for the first time since the ECB/BoE February policy meetings. January UK retail sales this morning beat consensus. They grew by 1.9% M/M for the headline number and by 1.7% M/M for the core retail sales. The increase was driven by a pickup in spending on household goods and at garden centres. UK markets don’t react. Earlier this week, we’ve had a good labour market report and higher inflation numbers. The combination of these data keeps the BoE clearly on the normalisation path.

News Headlines

•          Contrary to price developments in many other countries, price rises in Japan in January remained subdued. Japan’s headline CPI eased from 0.8% Y/Y in December to 0.5% Y/Y. The closely watched measure excluding fresh food eased to 0.2% Y/Y, from 0.5%. Ex-fresh food and energy, prices even declined 1.1% Y/Y. All measures were lower than expected. Even so, Japanese inflation is expected to rise later this year as a base effect of a cut in mobile fees last year will drop out of the data. Energy prices rose 17.9% Y/Y. Even so today’s data suggest that Japanese firms remain reluctant to pass through higher input prices to end consumers. The yen eases slightly this morning. USD/JPY (115.25) regains the 115 handle after a risk-off driven setback yesterday/early this morning.
•          According to Reuters, a proposal to revive the 2015 nuclear deal with Iran is to work out subsequent steps that parties have to fulfil. A 20 page draft is said to include that Iran needs to halt enrichment of uranium above 5% purity. Other steps are said to include unfreezing of $7bn in Iran funds blocked at South Korean banks and the release of Western prisoners in Iran. The lifting of restrictions on the country’s oil sector would only come later in the process. As was the case in the original deal, the US would grant Iran waivers on sanctions rather than removing them all-together. The implementation of this whole process, assuming an agreement will be reached, can still take a few months. Brent oil this week eased from a top near $96.75 p/b to $92.75 currently.


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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