Monday, 24 October 2022
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•          The US yield curve turned less inverse at the 2-10 part last Friday with yields dropping 0.9 bps (10-yr) to 13.7 bps (2-yr). The very long end underperformed, still adding 10 bps (30-yr). A doji-like pattern is emerging in the US 10-yr yield with shorter tenors displaying more engulfing-style pictures. We admit that calling corrections in this year’s bond sell-off turned out the new widow-maker trade, but nevertheless make our shot. The turnaround started last Friday as the Wall Street Journal – closely tied to Fed offices – published an article suggesting that Fed policy makers are contemplating slowing down the tightening pace from the current 75 bps pace. Such move is granted for next week, but could be watered down to 50 bps moves from December. The article caught markets off guard as one of last week’s main trading themes was Fed talk about a 5% rather than 4.5% policy rate peak. While the article doesn’t question the need to move further than suggested by the September dot plot if needed, it makes the case for more incremental hikes given that the (absolute) level reached after last month will already be a restrictive one. SF Fed Daly was the first to follow-up on the planted (?) article saying that it’s time to start thinking about slowing interest rate hikes. With the Fed about to enter the blackout period ahead of the November 2 policy meeting and next important US eco data only due that same week, we see scope for correction on one-way traffic higher in bond yields with some investors for once not willing to err on the hawkish side anticipating new guidance from Chair Powell.
•          Chinese markets don’t take Xi Jinping’s third term in power well this morning. They lose 1% to 2%. Hong Kong is the obvious underperformer, sliding 5% to 6%, as a foreign proxy for investing in China. A mixed bag of eco data (see below) gives no guidance. USD/CNY trades at 7.25 for the first time since early 2008. Other talking points this morning are Japan’s new batch of FX interventions last Friday. They pulled USD/JPY off the multidecade high just below 152 to a close around 147.50. This morning’s action shows that the invisible hand of the Ministry of Finance remains at play around 149. The FT suggests that Japan used at least $30bn after spending $20bn in September. Sterling is stronger this morning after ex-PM Johnson dropped out of the Downing Street race before he even stepped in. Today’s eco calendar contains October EMU PMI’s. We don’t expect them to derail thinking on the outcome of Thursday’s ECB meeting.

News Headlines

•          Delayed Chinese GDP data showed its economy growing 3.9% q/q or 3.9% y/y in Q3. It marked a stark rebound from Q2, when growth was weighed down by a harsh two-month lockdown in Shanghai. In accompanying September data, industrial production rose 6.3% y/y but retail sales came in at an underwhelming 2.5% y/y. Highlighting the ongoing real estate crisis, property investment fell 8% YtD compared to the same period last year while home prices eased for a thirteenth consecutive month. The unemployment rate ticked higher, from 5.3% to 5.5%. September exports rose 10.7% y/y in CNY terms while imports advanced 5.2%, keeping the trade balance surplus near its series high.
•          Rating agency Fitch affirmed the Czech Republic’s long-term foreign currency debt rating at AA- with a negative outlook. The solid rating is underpinned by credible macroeconomic and monetary policies, a robust institutional framework and strong external finances. The negative outlook reflects downside risks coming from the energy crisis on the economic and fiscal performance which Fitch expects to keep the debt/GDP ratio on an upward trajectory in 2022 (43.4%) and 2023 (45.4%). It sees Czechia’s deficit hitting 5.2% this year and 4.8% in the next amongst others due to electricity and gas price caps. Growth is forecasted at 2.3% in 2022, better than the 1.5% in the previous review before stagnating in 2023. Inflation was revised upwards, to 15.2% this year and 8% in 2023. Easing inflation and slowing growth could spell the beginning of an easing cycle in mid-2023.


The ECB ended net asset purchases and lifted rates by a combined 125 bps at the July and September meetings. More tightening is underway but the ECB refrained from guiding markets on the size of future hikes. Germany’s 10-yr yield rose to its highest level since 2011 (2.5%) with real rates driving the push higher. First support in case of corrections stands at 2.14%

The Fed policy rate entered restrictive territory, but the central bank’s job isn’t done yet. The policy rate is expected to peak above 4.5% early next year and remain above a neutral 2.5% over the policy horizon. QT hits max speed. The 10y reached its highest level since 2007. Doji on the charts suggests room for short term correction with some Fed members calling to slow the tightening cycle.

EUR/USD is in a strong downward trend channel since February. The dollar remains the main beneficiary of rising US (real) yields in a persistent risk-off context. Geopolitical and recessionary risks are bigger for Europe, holding down the single currency as well even as the ECB finally embraced on a tightening cycle. Resistance stands at EUR/USD 0.9950/1.0050.

The UK government had to backtrack on its lavish fiscal spending plans which sent sterling initially tumbling towards the EUR/GBP 0.90+ area. Yawning twin deficits and rising risk premia will continue to weigh on the UK currency longer term even as markets think that the BoE will have to step up its tightening cycle.

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). Read the full disclaimer.

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