• The core bond sell off last week lasted until the US close. Double digit UK inflation numbers, US retail resilience, hawkish messages from the RBNZ & Norges Bank and finally an avalanche of Fed comments all contributed to refocus on inflation dynamics and front-loaded tightening by central banks. It broke ranks with the core bond/stock market comeback since mid-June when the onus was on recessionary fears which would keep central banks sidelined sooner. UK gilts underperform German Bunds who in their turn underperformed US Treasuries. On a weekly basis, UK yields added 17.7 bps (30-yr) to 45.8 bps (2-yr) in a bear flattening move. German yields added 16.9 bps (30-yr) to 28.8 bps (3-yr) with the curve moving in similar fashion. From a technical point of view, longer term yields broke out of their corrective downward trend channels. The US yield curve turned less inverse with weekly changes varying between +14.8 bps (7-yr) and -1.3 bps (2-yr). European and US stock markets on Friday again fell prey to the ferocity of the core bond sell-off with main indices losing 1% to 2%. The dollar outpaced peers despite the relative yield disadvantage. The more difficult risk context is one explanation. A second one is in the breakdown of the yield surge. Especially in Europe, higher inflation expectations made a larger contribution compared to real yields. Technically, EUR/USD’s failure to regain first resistance around 1.0350 was already a bad omen for the pair which closed the week at 1.0037. Sterling lost out against the euro given the global context with the pair exiting the corrective downward trend channel since mid-June and closing the week at 0.8485. Smaller, less liquid currencies (CEE, down under, SEK) faced a tough week with the commodity-related NOK and CAD being the only ones to more or less keep level with the euro (thus still losing out against USD). USD/JPY broke above 135.58 resistance, returning above 137.
• This morning’s PBOC easing (see below) doesn’t really influence global markets. Local stock indices slightly outperform (+0.5%) while CNY drops to a new YTD low at 6.83. Today’s eco calendar only contains some second-tier eco releases, but gets more exiting later on. EMU August PMI’s (tomorrow), Minutes of the previous ECB Meeting (Thursday) and US PCE deflators (Friday) are scheduled for release. This week’s main talking point will be the Kansas City Fed’s Jackson Hole symposium with Fed Chair Powell giving the key note speech on the economic outlook on Friday.We expect last week’s trends to last into that speech as markets reposition towards more hawkish central banks. We finally retain comments by German Bundesbank Nagel who warned for double digit German inflation in Autumn with inflation likely averaging more than 6% next year. It’s a strong nod towards continuing policy normalization in steps of 50 bps, as suggested by ECB Schnabel last week.
• At the monthly fixing, the PBOC this morning lowered the 1-year loan prime rate by 5 bps to 3.65%. The 5 year LPR was set 15 bps lower at 4.30%. The PBOC action follows other measures from the Chinese central bank last week to support the ailing property sector. The move also aims to revive credit flows to the broader economy as activity still struggles to rebound from Covid-lockdowns and as uncertainty on the local real estate sector is weighing on consumers’ moral. The yuan this morning weakens further against the dollar with USD/CNY trading near 6.827.
• In an interview with Bloomberg, RBNZ deputy governor Hawkesby indicated that the central bank wants the get the OCR cash policy rate comfortably above neutral in order to slow the economy and cool price pressures. The RBNZ last week raised its policy rate from 2.5% to 3.0%. Hawkesby assessed that the economy has been more resilient than expected. The central bank was deliberately ambiguous as it forecasted a potential 4.1% peak for the policy rate. There is a risk that the policy rate will have to be raised to 4.25%. According to Hawkesby, the RBNZ hasn’t settled on a new estimate for what the neutral policy rate might be, but the MPC talked about a range of 2% to 3% which is higher than a previous estimate of 2.0%.
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. Germany’s 10-yr yield broke out of the corrective downward trend channel since mid-June, suggesting more upside short term.
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. The 10y briefly dropped below the lower bound (2.70% area) of the sideways trading range, but a sustained break lower was averted.
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. Hawkish Fed comments going into the Jackson Hole gathering give the dollar new momentum. A second attempt to pierce parity is at hand.
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 . EUR/GBP exited the corrective downward trend channel since mid-June.
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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