Thursday, February 3, 2022

Daily Market Overview

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• The Bank of England did what it was supposed to do: raise rates. The MPC agreed on a 5-4 basis for a 25bps hike to 0.5%. The four members voting against were actually in favour of a 50bps bump! Bringing the base rate to 0.5% means the BoE seizes to reinvest proceeds from maturing government bonds. The central bank will also start actively selling from its £20bn big corporate bond portfolio. High inflation is the obvious driver. Price increases are now expected to peak at 7%+ in April. That’s 2 ppts higher compared to the November forecast. Inflation is expected to ease over time on the assumption of stabilizing energy prices, easing supply chain pressures and a decline in tradeable goods prices. Wage growth will strengthen further over the coming year before easing from 2023. This follows a loosening in the labour market as UK GDP growth is expected to slow to subdued rates beyond the near term on the adverse impact of high inflation on UK income and spending. The unemployment rate may rise to 5% by 2024 and excess supply may build to 1%. Growth was revised down to 3.75% (-1.25 ppt) in 2022, 1.25% (-0.25 ppt) in 2023 and 1% in 2024. Short-term though, more tightening is needed. Based on current market projections of the policy rate hitting a 1.5%/1.75% peak by mid-2023, the BoE sees inflation still above 2% in 2023. It won’t be until 2024 before inflation eases back towards/below the 2% target (1.6%). UK yields spiked on the decision on the fact that a 50 bps hike was such a close call. Changes range from 13 bps (2y) over 11.3 bps (10y) to 8.4 bps (30y). Markets now believe the policy rate may hit 1% already in May, triggering the next normalization phase of quantitative tightening sooner. This may explain why long tenors are also rising this sharply. Sterling gets bid with EUR/GBP hitting an intraday low just shy of the crucial 0.8277 support. The pair quickly pared some of those knee-jerk losses to change hands still north of 0.83 ahead of the ECB and even gained afterwards to 0.838 on genuine euro strength. The European Central Bank as expected hasn’t changed anything to policy (intentions). PEPP will be put to bed end March. APP will be raised to ensure a smooth transition before returning to the original buying pace in Q4 2022. Based on current guidance, this excludes the possibility of a 2022 rate hike. But. President Lagarde hinted this may change in March, saying that they will be looking in close detail to the inflation drivers, the upward risks surrounding it and its impact given the “unanimous concern” on current developments. She(rlock) noted the situation has changed and that it needs to be reassessed based on the data. Policy goals are “much closer to target”, she added. Lagarde also refused to repeat that an interest rate hike is “very unlikely in 2022” when explicitly asked to neither did she want to tell markets they were ahead of themselves. Those same markets got all the confirmation they wanted from the central bank and steam on. A first 10 bps rate hike is discounted for July already with a total of almost 30 bps more hikes priced in this year. Short-term European swap rates soar 10 bps (2y) to 12.5 bps (5y). The complete curve briefly hit positive territory for the first time since 2015. Since the ECB sticks to the official forward guidance, net bond buying needs to end quickly (in the summer?!) for rate hikes to happen. This launches the longer tenors as well up to 9.3 bps for the 10y. Peripheral spreads rise. Italy (+7 bps) underperforms. The euro is unchained: EUR/USD jumps more than a full big figure intraday to test the 1.14 big figure. European stock markets turn red on the clearest sign of European monetary policy finally being normalized.

News Headlines

The Czech National bank raised the policy rate by 75bps to 4.50%. The move was expected by most analysts, but there was an outside risk of 100bps, as some expected frontloading tightening which would allow the CNB to stop the cycle sooner. Inflation strongly outpaced the 2% (+/- 1%) target, printing at 6.6% in December. Central bank members indicated risks for inflation to move near 10% in the first months of 2022. Governor Rusnok holds a press conference later today and the CNB will update and comment quarterly economic forecasts tomorrow. The koruna touched the strongest level against the euro in more than 10 years near EUR/CZK 24.10 before the decision, but currently again trades in the 24.20 area.

Graphs & Table

European 2y swap yield turns positive after ECB hints at change in monetary policy stance at March meeting.

EUR/USD: euro unleashed on first tangible signal of policy normalisation.

EUR/GBP: shock effect of BoE’s almost-50-bps-hike faded quickly with euro strength taking the lead post-ECB.

EUR/CZK: Czech crown tested 10-year high before paring some gains after consensus-like 75 bps rate hike.

Note: All times and dates are CET. More reports are available at 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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