Wednesday, 26 October 2022
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Markets

•          Q3 corporate earnings this week add to the market shift away from inflation worries to recession risks. The likes of Microsoft and Alphabet recorded slower sales growth/disappointing digital ad revenue as rising costs squeeze companies’ marketing budgets. SK Hynix, the world’s second-largest memory chipmaker halved next year’s capital spending plans on cooling global demand. Philips earlier this week announced 4k job cuts. To know that earnings season is only just getting started… On the eco data front, US consumer confidence fell more than expected, from 107.8 to 102.5, the lowest level since April 2021. Both the present situation and expectations components drifted away. The October Richmond Fed Manufacturing index slipped from 0 to -10 (lowest since May 2020) with underlying details showing broad-based weakness. US house prices fell a second consecutive month (-1.32% M/M; biggest since March 2011). Data all contributed to this week’s correction on strong 2022 market trends. Core bonds gained more ground ahead of key central bank policy meetings. US yields fell by 2.8 bps (2-yr) to 14.1 bps (10-yr). The US 10-yr yield is set to drop out of the upward trend acceleration in place since early August. First minor support stands at 4% (previous September top). The German yield curve bull flattened with yields ending 3.1 bps (2-yr) to 19.4 bps (30-yr) lower. The German 10-yr yield is about to test the neckline of a short term double top formation at 2.14%. The final target stands at 1.75% which coincides with the October low. Stock markets gained up to 2% in Europe and 2.25% in the US. Bad economic news is interpreted as good news as it could sideline central banks sooner in their inflation crusades. The S&P 500 broke above the neckline of a short term double bottom formation at 3800 suggesting more corrective potential towards 4100. We must add though that US equity futures currently trade with significant losses following after-hour results by Alphabet. EUR/USD rallied towards the first resistance area at 0.9950 which is the upper bound of the downward trend channel in place since February. The October high and also neckline of a double bottom formation stands at 0.9999.
 
•          Today’s eco calendar is extremely thin. We keep a close at the policy decision by the Bank of Canada. Money markets discount another 75 bps rate hike which would bring the policy rate at 4%. The BoC has been frontrunner with an aggressive tightening campaign amongst global central banks. Should they indicate a slower path ahead, it could be seen a signaling function for bigger central banks as well and that may add to the current correction trends across asset classes.

News Headlines

•          Australian inflation showed no signs of abating whatsoever in the third quarter, rising from 6.1% to 7.3% y/y thanks to a 1.8% q/q increase. The numbers beat 7% & 1.6% consensus estimates. Core inflation surged further to 5% and 6.1%, depending on the gauge. Among the biggest contributors were new dwellings (3.7% q/q), gas (10.9%) and furniture (6.6%). The Reserve Bank of Australia pared the rate hike pace to 25 bps earlier in October to 2.60%. It assumes inflation to peak a bit below 8% over 2022 but that seems outdated with today’s numbers. It did leave the door open for further tightening in coming months. The Australian swap curve adds between 3.1-7.5 bps at the front end. Money markets’ priced in terminal rate of 4-4.25% is more or less unchanged after today’s release. The Aussie dollar marginally gains to AUD/USD 0.64.
 
•          Pawel Borys, an advisor to Poland’s prime minister, yesterday said the government in tandem with the National Bank of Poland (NBP) and the state lender is deliberately curbing longer-term zloty liquidity in a bid to shore up the currency and help fight high inflation. Several factors are seen at play. The NBP first lifted the required reserve ratio gradually, with the latest increase to 3.5% having taken effect from March this year. Meanwhile the government absorbed large amounts of liquidity by selling more than 30bn zloty retail bonds at attractive prices. Poland’s state bank then lent out any excess cash, exacerbating the crunch. Since early October, the zloty has strengthened from EUR/PLN 4.9 to 4.76 currently.

Graphs

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

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). Read the full disclaimer.

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