Friday, 29 April 2022
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Markets

•          Dollar dominance reflected in new multiyear highs on a trade-weighted basis (DXY 103.93), against the yen (USD/JPY 130.95), against the euro (EUR/USD 1.0472) and against sterling (GBP/USD 1.2412). Fed Chair Powell’s comments last week ignited the dollar rally which was reinforced at first by a sell-off in US Treasuries and next by spill-over effects to the stock market (aggravated by Chinese growth slowdown worries). Powell clearly wants to pursue a strategy to get to neutral policy rate levels as soon as possible, starting with a 50 bps rate hike next week. The quantitative tightening process will begin as well. Yesterday’s Q1 US GDP numbers hid underlying domestic strength from personal consumption and business investment and won’t derail the Fed’s tightening plans. The US yield curve flattened yesterday with changes ranging between +2.6 bps (2-yr) and -2.8 bps (30-yr). German yields rose by 8 bps (30-yr) to 11 bps (5-yr) across the curve. The EU 10y swap rate tested the YTD high at 1.68%. Yesterday’s European moves were entirely driven by higher inflation expectations. National inflation numbers showed signs of accelerating core inflation in Spain, Belgium and Germany and highlighted the ECB’s inflation/credibility problems even as headline numbers rose slightly (GE), stabilized (BE) or even came off peak (?) levels (SP).
 
•          Asian stock markets trade in positive territory this morning. Japan is closed. Chinese stocks eventually lagged as the government recommitted to its zero-covid policy, but made an impressive catch-up towards the end of dealings. They currently gain 2% to 4% as the Chinese politburo pledged more policy support in order to reach growth targets. It said that authorities should “strengthen macro adjustments, strive to achieve full year economic and social development goals, and keep the economy running within a reasonable range”. The Asian performance hides losses for US stocks following disappointing guidance in Apple earnings. Today’s eco calendar contains EMU GDP and CPI numbers, but those won’t alter perception against European assets as long as the ECB doesn’t play ball. US personal income/spending data, PCE deflators and Chicago PMI are wildcards. Overall, we think risk sentiment will determine whether or not there’s room for some correction on general FI and FX market trends. If any, we don’t expect them to go far ahead of next week’s FOMC meeting. UK markets are closed on Monday for May Day holiday.

News Headlines

•          Next week’s Northern Ireland’s elections (May 5) for the Stormont assembly could result in a historic shift in the balance of power. The Sinn Féin is in pole position to take over from the pro-British DUP. In a recent poll, the unionist party drew 26% support, 6 points ahead of the DUP. If realized, it would mean Sinn Féin’s leader Michelle O’Neill would become First Minister for the first time since the power-sharing government was established following the Good Friday Agreement in 1998. The second-biggest party, projected to be the DUP, gets to deliver the Deputy First Minister, a position that is equal in power. However, the DUP has repeatedly refused to say if it would accept such a role, as it may create the perception of the party propping up a Sinn Féin government. One minister cannot be in function without the other. Both parties also differ in view on the Northern Irish protocol, which the DUP wants removed. The NI assembly gets to vote on key parts of that protocol in 2024.
 
•          The ECB published a mea culpa for consistently and substantially underestimating inflation. It made its worst ever forecast in December, when eurozone inflation was expected to decline to 4.1% in Q1 this year. Instead, prices soared to 6.1%. The ECB blamed unprecedented energy price increases, supply chain bottlenecks and the effects from reopening the economy for the huge misses. But it added that “international institutions and private forecasters have recently made similarly large errors” and labeled its accuracy as similar to that of the Fed and BoE. The latter have both started to normalize policy in response though. EMU inflation is due later today with April headline inflation seen stabilizing at 7.5% but core inflation picking up to 3.2%.

Graphs

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.
The authors of this recommendation do not warrant the accuracy, completeness or value (commercial or otherwise) of any recommendation. Neither are the authors liable to those who receive these recommendations for the content of it or for any loss or damage arising (whether in tort (including negligence), breach of contract, breach of statutory duty or otherwise) from any actions or omissions of the authors in reliance on any recommendation, or for any claim whatsoever in respect of the content of, or information contained in, any recommendation. Any opinions expressed herein reflect the judgement at the time the investment recommendation was prepared and are subject to change without notice.
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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