Tuesday, 22 March 2022
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•          A further rise in oil prices and Fed’s Powell’s updated ‘forward guidance’ only a few days after last week’s policy meeting put interest rate markets on red alert yesterday. The rise in oil prices initially kept inflation expectations under upward pressure, especially in Europe. At the same time US yields were already upwardly oriented, inspired by hawkish comments from Fed governors Bostic and Bullard. At an appearance before the National Association for Business Economics, Powell clearly flagged that these hawkish intentions are drawing ever more support within the FOMC. The Fed Chair stopped just short of formally announcing a 50 bps rate hike at the May meeting. ‘If we conclude that it is appropriate to move more aggressively by raising the federal funds rate by more than 25 basis points at a meeting or meetings, we will do so’. On how far the rate hike cycle should go, he said ‘If we determine that we need to tighten beyond the common measures of neutral and into a more restricted stance, we will do that as well’! The message for interest markets was unambiguous. The US yield curve sharply bear flattened with yields jumping between almost 18 bps for the 2-y and 5-y; 13.9 bps for 10’s and 9.7 bps for the 30-y. The move was mainly driven by a sharp rise in real yields. However, (10-y) inflation expectations (TIPS) almost immediately reversed an intraday decline (+1.9 bps)! Markets now are discounting an implied policy rate of 2.0%-2.25% at the end of the year (six meetings left). European yields extended an intraday uptrend mainly driven by higher inflation expectations, resulting in a bear steepening (Bunds 2-y + 5.4 bps; 10 & 30-y + 9.7 bps). The impact on markets outside the bond markets again was much more moderate. US equites reversed opening gains but closed with modest losses (S&P -0.04%; Nasdaq -0.4%). On FX markets, the dollar evidently outperformed, but the gains were again not excessive. EUR/USD drifted further south to close at 1.102 (vs 1.1051 on Friday). USD/JPY finished at 119.47 (from 119.17). UK interest rate market also again changed their mind after last week’s dovish BoE rate hike, with yields rising up to 14 bps (10-y). Sterling rebounded (EUR/GBP close 0.8366)
•          This morning’s reaction in Asian markets to the hawkish Fed speak remains constructive. The prospect of additional (mainly fiscal) help (cf infra) supports especially Japanese markets. The dollar and US rates are decisively upwardly oriented. Later today, the eco calendar is thin. However, there is again a very long list of Fed and ECB speakers, including Villeroy, Lagarde, de Guindos and chief economist Lane. For the German 10-y yield, the 0.58% October top is coming on the radar. Dollar gains are modest but look rather sustained. EUR/USD breaks below the 1.10 barrier, suggesting potential retracement back to 1.0806. Or will ECB speakers also adapt their forward guidance?

News Headlines

•          Japanese daily newspaper Sankei Shimbun reports that Japan’s government and ruling coalition are preparing to draw up additional economic stimulus worth more than ¥10tn to offset the rising price of crude oil and other commodities as well as support small businesses. Potential measures include extending subsidies for gas and other fuel beyond end March and subsidies to dampen the impact of food prices. Another newspaper suggests that planned handouts for pensioners could be extended to younger people as well. On the monetary front, BoJ governor Kuroda stressed again that it is too early to discuss any monetary easing exit. The combination of monetary & fiscal expansion, surging oil prices and rising global interest rates is hurting the yen extremely badly. USD/JPY this morning crosses above 120 for the first time since early 2016. Key resistance (2015 top) stands at USD/JPY 125.86.
•          China’s Xinhua news agency reported that the cabinet of PM Li Keqiang called for the adoption of monetary policy tools to sustain credit expansion at a stable pace. According to the report, the Chinese government doubles down on last week’s pledge to support the economy and markets. The statement doesn’t specifically mention a reserve requirement rate cut, but zooms in fiscal support including about 1tn yuan of tax refunds for smaller firms. The yuan trades in the defensive since early March with USD/CNY again somewhat firmer this morning near 6.3650.


European yields recovered from the setback by the Russian-Ukrainian war. It will slow down growth but didn’t deter the ECB from formally stepping up the normalization plans. QE is to end in Q3 with a rate hike in the next quarter . Real yields may further bottom out while inflation expectations may ease but will probably remain elevated. Next resistance stands at 0.58%.

The Fed started its tightening cycle and published an aggressive blueprint for the remainder of the year. A 50 bps rate hike May is likely. The US yield curve extended its bear flattening trend. Plans to shrink the balance sheet will be published in May. Medium term, the sell-off on core bond markets isn’t over.

EUR/USD tested the 1.08 pandemic support zone but survived. A subsequent short squeeze propelled the pair then back to 1.10. The ECB sticking to – accelerating even – the normalization schedule is a (latent) positive for the common currency. It protects EUR/USD’s downside even as the Fed conducted its policy rate lift-off. US (real) policy rates remain deeply negative.

Sterling proves no longer resilient to the uncertain risk environment. Combined with new-found euro vigor, EUR/GBP took out the first resistances between 0.82 and 0.83. A return above 0.845/72 would bring the pair back in the sideways trading range that dominated 2021. Regarding monetary policy, the balance after the March ECB and BoE meetings turned more even.

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).
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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