Friday, 20 May 2022
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•          European stock markets eventually lost 1.5% to 2% yesterday. Given WS’s performance on Wednesday evening, the damage remained “contained”. It’s nevertheless telling that stocks barely managed to show some form of intraday rebound following those steep opening losses. Market wires played that same tune. Central bankers are preparing to up the ante in both tackling inflation and re-anchoring inflation expectations even if it can cause harm to an already weakening economy. US stock markets ended a day fluctuating near the sell-off lows with daily losses of 0.25% to 0.75%. Again, unconvincing. Eco data included a small tick-up in weekly jobless claims, but especially an unexpected drop in Philly Fed Business Outlook (lowest since May 2020). Details differed from the weak Empire Manufacturing Survey earlier this week. New orders and shipments improved, with the employment component, average workweek and inventories dragging the headline number lower. Both prices paid and received remain at elevated levels, but moderated compared to April. Safe haven flows underpinned core bonds. The US yield curve bull steepened with yields sliding by 6.1 bps (2-yr) to 1.5 bps (30-yr). The German yield curve bull flattened with yields dropping 1.7 bps (2-yr) to 7.9 bps (30-yr). Unlike Wednesday, the dollar failed to profit in this climate. The nature of bond move in the US (underperformance front end) has likely to do with it. The trade-weighted greenback closed below 103 for the first time since early May. Support stands at 102.35 which is the neckline of a double top formation. USD/JPY shows a more or less similar technical formation with neckline support tested at 126.95. EUR/USD closed just below 1.06, compared with opening levels around 1.0460. First, minor, resistance, arrives at 1.0642.
•          Asian stock markets gain around 1% this morning with China (up to 2.5%) outperforming. The rumoured PBOC rate cut came this morning. The central bank cut the 5-yr loan prime rate by 15 bps from 4.6% to 4.45%. The rate is key reference for home mortgages and aimed to boost loan demand. The 1-yr loan prime rate was left unchanged at 3.7%. The response on global bonds and FX markets is much more guarded. Interestingly, the Chinese yuan gains (in a sign of a softer USD) with USD/CNY moving back below 6.70 for the first time since early May. Ahead of the weekend, we’re inclined to err on the side of caution with regards to risk sentiment. UK April retail sales this morning beat consensus, by rising 1.4% M/M both for the headline and core number. Sterling isn’t impressed, with EUR/GBP trading just shy of the 0.85 big figure.

News Headlines

•          Japanese headline inflation and a measure excluding fresh food jumped to 2.5% and 2.1% respectively in April, from 1.2% and 0.8% in March. It’s the first time since 2014-2015 that inflation surpasses the 2% BoJ target. Back then, tax hikes artificially boosted prices and statistical effects are at play this time too. April’s sharp acceleration is to a large extent the result of cheaper phone fees fading out from a year ago (adding 1 ppt to the figure). The narrowest core gauge (ex fresh food and energy) shot up as well, though remains with 0.8% (up from -0.7% last month) well below target. Today’s figures are unlikely to change the BoJ’s policy stance. It already said that the current surge is cost-push inflation and unsustainable. It may even hurt consumer spending instead and eventually act as an opposing force unless wage growth picks up materially. The Japanese yen trades unchanged around 127.67 this morning.
•          GfK consumer confidence in the UK dropped to the lowest on record. At -40, down from -38 in April, it surpassed the previous trough seen in the aftermath of the GFC (-39). The economic situation over the last and next 12 months was seen darker still in May compared to the previous month. Personal finances for the next 12 months tanked in recent months in the midst of the worst cost-of-living crisis in decades. The indicator stood at -26 in April. At -25 in May, UK consumers barely expect the situation to improve any time soon. Saving intensions held at the post-pandemic low of 10. Sterling currently holds steady, south of EUR/GBP 0.85.


The ECB will end net asset purchases in June. A first rate hike is likely in July (or even June?!). Speculation has caused real yields to bottom out. Inflation expectations, while stile high, are correcting lower from record highs. The worrying growth outlook complicates the picture and triggered a first meaningful correction since the start of the Russian invasion. Support at 0.80% stood firm.

The Fed started its tightening cycle and published an aggressive blueprint for the remainder of the year. 50 bps rate hikes at the next meetings can be taken for granted. Quantitative tightening will start in June and hit max speed from September onwards. But the recent yield surge this caused as markets adjusted, has eased recently. Yields may be entering a period of consolidation. Important support is located at 2.72%.

EUR/USD lost the previous YTD low at 1.0806 and the 2020 bottom at 1.0636, suggesting a return to the 2017 low at 1.0341. Even president Lagarde finally caving for a July rate hike couldn’t lift the euro’s spirits. Too little, too late?! Russian war in Ukraine plays in the euro’s disadvantage as well.

The developing cost-of-living crisis seems to hit the UK economy first and the hardest. Weak economic data toughen the Bank of England’s dilemma in battling inflation with doubt starting to filter through in markets. Open division within the BoE and the limited room for further tightening pushed EUR/GBP temporary above the 0.8512 level. A sustained break would be a bad omen for sterling.

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.
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