Tuesday, 29 November 2022
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Markets

•          In the absence of important eco data, the new China Corona outbreaks and central bank speak were the main drivers for trading yesterday. In the end, it turned out to be a risk-off session with US indices losing about 1.50%. Fed and ECB Governors sounded rather hawkish. Even ECB’s Lagarde admitted that the it’s too early to already conclude that inflation actually reached its peak. Fed members (Bullard: markets are underpricing the risk the Fed will have to be more aggressive rather than less aggressive; Williams: a somewhat higher underlying inflation suggests a modestly higher interest rate path relative to September; Barkin: rates to be higher and for longer) also kept a hawkish tone. CB speak and technical considerations caused US and European yields to reverse earlier declines, but a substantial slide in US equities prevented yields to close really higher. US yields closed mixed with the 2-y and 30-y yield ceding 1.5/1.1 bps. The 5-y rose 1.7 bps. German yields also reversed the early decline to close less than 2 bps different from Friday. The German 10-y yield (1.99%) finished just below the 2.0% barrier. The dollar initially didn’t profit from the (mainly China driven) risk-off. EUR/USD even came within reach of 1.05, but returned intraday gains in US dealings to close at 1.0345. USD/JPY showed a similar pattern reversing an intra-day dip near 137.5, to close the day at 138.95. Sterling traders threw the towel, with EUR/GBP rebounding off the key 0.856 area to close at 0.865.
 
•          This morning, Chinese equities show a remarkable comeback (Hang Seng + 4.0%, CSI 300 +2.8%). Investors apparently hope for an easing of the strict Covid policy. The yuan rebounds (USD/CNY 7.1575). The dollar trades in the defensive (USD/JPY 138,6; DXY 106.20; EUR/USD 1.0385). Oil (Brent $84,75/b) is looking for a bottom after its recent sharp decline.
 
•          Later today, the calendar is becoming interesting. US consumer confidence (conf. board) is expected to ease from 102.5 to 100. US housing price data also are expected to ease further. In EMU CPI data from Spain, Belgian and Germany will give a preview for tomorrow’s Flash EMU CPI. The monthly dynamics are expected to slow sharply (0.1% expected for Spain and Germany), but y/y readings will stay high (German expected at 11.3% from 11.6%). The North Rhine Westphalia release this morning (-0.8%M/M and 10.4% Y/Y) suggests downside risks to the consensus.  Whatever the outcome, the market reaction will be interesting, with EMU/German yields showing tentative signs of bottoming after a decline of more than a month. Will the German 10-y yield sustainably regain the 2.0% barrier? On FX markets, the dollar recently traded in the defensive and still looks vulnerable to bad eco news. At the same time, key technical levels (DXY 105.3, EUR/USD 1.0479/1.05) might hold if global risk sentiment were to deteriorate further with US equity indices showing tentative signs of a topping out process. A return of EUR/USD to/below 1.0223 would call of the EUR/USD recovery/USD correction.

News Headlines

•          In comments published yesterday, Polish central banker Dabrowski said that she aligns with markets to assume that already next year we may see the first policy rates cuts. She puts forward a policy rate closer to 6% compared with the current 6.75%. Falling money supply, rising consumer deposits and weakening demand all point to abating price pressure even as Polish inflation currently stands at 18% Y/Y. Dabrowski adds that Poland isn’t experiencing a wage-price spiral as “workers feel we have a slowdown and they are not escalating their pay demands”. The Polish MPC remains a dovish stronghold around strongman Glapinski whose term expires early next year. The zloty didn’t react to the comments. Instead, EUR/PLN tested the November low at 4.67 despite a risk-off market climate.
 
•          The Japanese labour market remains tight. The job-to-applicants ratio climbed from 1.34 to 1.35 last month with the unemployment rate stable at 2.6%. A separate report showed retail sales growth decelerating to 0.2% M/M in October (4.3% Y/Y). Consumption is expected to slow further as wages can’t keep up with Japanese inflation.

Graphs

The ECB ended net asset purchases and lifted rates by a combined 200 bps since the July meeting. 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%) before a correction kicked in. Losing the neckline of the double top formation at 1.95% calls for a return towards the 1.82%/1.77% support zone

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 5% early next year and remain above a neutral 2.5% over the policy horizon. A below-consensus CPI print strengthened some Fed members call to slow down the tightening pace, triggering a strong correction. The move below the neckline of the double top formation at 3.91% suggests a return to 3.64%/3.55% in first instance.

USD for the largest part of this year profited from rising US (real) yields and a risk-off context. Geopolitical and European recessionary risks kept EUR in the defensive even as the ECB finally started a tightening cycle. But as dollar fatigue kicked in, EUR/USD finally left the strong downward trend channel since February. After a first failed attempt, the pair is again forcing a break through resistance around 1.0341/50/68 in a sustainable way.

The new UK government’s fiscally conservative approach brought calm to the market, sterling included. But still-yawning twin deficits and rising risk premia will continue to weigh on the UK currency longer term. The Bank of England stepped up its tightening with a 75 bps rate hike, but warned simultaneously that UK money market expectations about peak cycle are way too aggressive. EUR/GBP 0.856 serves as important support.

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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