Tuesday, 26 April 2022
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•          A Chinese growth slowdown ranks as one of the biggest risks to future global growth. March data already showed the impact of lockdowns in Shanghai (still in place), with an outbreak in Beijing over the weekend adding to worries. Risk sentiment soured in Asian and European dealings with main equity indices losing over 2%. Wall Street eventually made it off the intraday lows to close in positive territory in an intriguing comeback. Core bonds corrected significantly higher following last week’s sharp hawkish repositioning. The decline at the longer end tenors was mostly driven by a decline in inflation expectations resulting from uncertainty around future growth/demand. European bonds significantly outperformed US Treasuries, again risk sentiment turned after the European bell (thus pulling US T’s off best intraday levels). US yields eventually closed 4 bps (2-yr) to 8.3 bps (7-yr) lower with the belly of the curve outperforming the wings. German yields lost 8.3 bps (30-yr) to 16.3 bps (5-yr). The UK Gilt curve bull steepened with yields sliding by 9 bps (30-yr) to 15.5 bps (2-yr). The dollar remains markets’ favorite both in the risk-off setting and because of the Fed’s determination to tackle the inflation problem. The trade-weighted greenback (DXY) closed at 101.86, eying the 2020 top at 102.98. EUR/USD closed at a new cycle low of 1.0713 from an open at 1.0807. Commodities and commodity-related currencies suffered a setback as well. Brent crude for example touched $100/b from a >$105/b open, before bouncing back above $103.
•          Asian markets this morning join WS’s better shape yesterday evening. Core bonds are slipping away again. It’s still early days, but it could be that yesterday’s moves on bond markets was some profit taking on short positions with markets gradually keeping next week’s FOMC meeting in mind. The trend on bond markets has been very strong with an aggressive Fed tightening cycle discounted by now. Why not lock in some gains awaiting some fresh guidance? The dollar stabilizes near yesterday’s closing levels. Today’s eco calendar is interesting in the US with March durable goods orders, housing data, consumer confidence and Richmond Fed manufacturing. We especially eye consumer confidence to see how Joe Sixpack stomachs the inflation surge. The US Treasury starts its end-of-month refinancing operation with a $48bn 2-yr Note auction. It will be interesting to see whether demand picks up at current absolute yield levels (2.64%). It might be just a little bit too early with US money markets pricing a 3%+ policy rate peak next year. Q4 corporate earnings and a speech by ECB Villeroy are wildcards.

News Headlines

•          South Korean GDP expanded by 0.7% q/q in the first quarter of this year, or 3.1% y/y. The quarterly increase was exclusively driven by net-exports, adding 1.4 ppts to the headline figure. Private consumption (-0.2 ppts) and gross capital formation (-0.5 ppts) were a drag as the country in Q1 grappled with the highest virus tally ever. Economic momentum is set to hold up in the current quarter, thanks to a rebound in consumption and ongoing strong exports. This allows for the central bank of Korea to continue its hiking cycle (policy rate now 1.5%) to tackle above-target inflation (4.1% in March). A key risk going forward is China’s growth slowdown affecting exports. Rising commodity prices meanwhile will impact both consumption and inflation and increase the BoK’s policy dilemma. The SK won trades stoic around USD/KRW 1248.5 this morning. Barring the volatile period in the early pandemic days, that is near the weakest level for the won since 2010.
•          Bank of Canada governor Macklem was the most explicit about another 50 bps rate hike at the next policy gathering in June yet. Speaking at a parliamentary committee hearing, he said the MPC “will be considering taking another 50-basis point step”. The idea of an even larger hike (eg. 75 bps) floated last week would be “very unusual”, Macklem said. Canadian short-term swap yields fell almost 10 bps but were already declining before his speech. Markets did price in lower odds of such even larger increase. Instead they stick to three consecutive 50 bps hikes at every meeting through September. The Canadian dollar eased to USD/CAD 1.273.


European yields recovered from the early stages of the Russian-Ukrainian war as the expected growth slowdown didn’t deter the ECB from formally stepping up the normalization plans. Net asset purchases will end in June, with a first rate hike likely in July. Runaway inflation expectations suggest the ECB’s response will still be too little, too late. Next resistance stands at 1.06% (2015 top)-

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. The US yield curve extended its bear flattening trend. Quantitative tightening will start soon (>=$95bn/month). The psychologic 3% resistance holds for now.

EUR/USD remains stuck in a downward trend channel. Losing the previous YTD low at 1.0806 implies a technical return to the 2020 bottom at 1.0636. ECB needs to step up its inflation response to give the single currency much needed backing. 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. EUR/GBP bounced off the 0.82/0.83 support zone. The YTD high at 0.8512 is first meaningful resistance.

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.
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.
This document is only valid during a very  limited period of time, due to rapidly changing market conditions.

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