Wednesday, 23 February 2022
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•          Yesterday’s lackluster Bund performance during Asian dealings even as geopolitical tensions intensified dramatically was the writing on the wall. German yields gapped lower at the European open but almost immediately started recovering afterwards. Support in the German 10y (+3.7 bps) yield around 0.15% easily survived. The curve eventually bear flattened with changes ranging from +5.5 bps (2y) to 2.2 bps (30y). US yields traded a similar pattern on their first trading day of the week. Yields advanced 8.4 bps (2y) to 1 bp (10y). The implications of higher energy prices on expected central bank policy thus outweighed safe haven flows. Perhaps some geopolitical fatigue kicked in as well. European stocks for example erased all opening losses (>2%) to finish flat. Wall Street ended with losses of about 1.4% (DJI) but had to catch up a risk-off session on Monday. Economic data included a better-than-expected (but not really after Monday’s strong PMIs) February German Ifo indicator. US Conference Board consumer confidence declined from 111.1 to 110.5 (110 expected). Americans are particularly less optimistic about the future with income and employment prospects deteriorating. They expect the inflation rate one year head at 7%, up from 6.8%. The US dollar traded mixed; gaining against sterling but losing out vs. the euro. EUR/USD bounced off the 1.13 big figure to close at 1.133. USD/JPY eked out a gain to north of 115. EUR/GBP surged to an intraday high near 0.838 (from 0.831) before retracing part of that move to 0.834. BoE’s Ramsden made his case for further policy normalization though suggested markets are positioned too aggressively.

•          Asian-Pacific markets this morning hold up well. They seem in some kind of a buy-the-rumour, sell-the-fact on Russia’s semi-invasion which was then followed by sanctions. Japanese markets are closed. Bund and Treasury futures edge lower. FX markets trade muted. The kiwi dollar outperforms after the central bank substantially lifted its terminal rate expectations (see below). It was basically the single most important event on today’s economic calendar. There’s a slew of central bank speeches scheduled which serves as a wildcard. ECB’s Holzmann kicked off saying the central bank should consider two hikes this year. He favours a start in the summer, even before net purchases have ended. A neutral rate of 1.5% is realistic by 2024, Holzmann added. We also keep an eye at the Bank of England’s testimony before parliament. Aside from that, risk sentiment remains key in driving trading for the time being. Current sentiment is constructive and keeps the downside in core bond yields protected. EUR/USD struggles to convincingly leave the 1.13 support area behind. A return north of 1.1386/1.14 is needed for some ST reprieve. The same goes for EUR/GBP which remains dangerously close to current YtD lows.

News Headlines

•          The Reserve Bank of New Zealand (RBNZ) conducted a third consecutive 25 bps rate hike this morning, lifting the policy rate to 1%. Minutes showed it was a balanced call as the MPC considered an aggressive 50 bps rate hike as well. Nevertheless, the statement is clear: more tightening is needed with employment above its maximum sustainable level and headline CPI will above the RBNZ’s target range. The central bank expects the policy rate to reach 2.2% by the end of the year, slightly above its 2.1% forecast in November. The NZ money market is even more aggressive, suggesting a policy rate of around 2.75%. However, the biggest change from the RBNZ comes from 2023 policy rate forecasts which now show a peak policy rate of 3.3% end 2023 (vs 2.6% in November). The RBNZ lifted its inflation forecasts for fiscal year 2022 and 2023 to 6.6% (from 5.7%) and 3.2% (from 2.9%). Growth is expected stronger in fiscal 2022 (5.3% from 4.5%), but weaker in 2023 (2.9% from 4.2%). Uncertainty created by the persistent impacts of Covid-19, rising inflation and tighter (global) monetary conditions all play a role. In addition to its rate hike call, the RBNZ agreed to commence a gradual run-off of its balance sheet, both through bond maturities and managed sales. The RBNZ expects its bond portfolio to fade to zero (from currently >NZD $50bn) by the end of 2027. The kiwi dollar strengthens this morning to its best level in over a month (NZD/USD 0.6765). The NZD swap rate curve bear flattens with yields adding 2 bps (20-yr) to 11 bps (2-yr).


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 Fed’s hawkish policy turn caused a surge in real yields. The US 10-yr yield took out the October top at 1.7%. The January CPI release triggered a first brief return above 2%. Markets remains split between a 25 and 50 bps March rate hike. 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 (in Q3?), allowing for a first rate hike later this year (Q4). 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.
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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.
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