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Friday, May 6, 2022

Daily Market Overview

Click here to read the PDF-version of this report.

Markets

• ECB’s Holzmann suggesting a June rate hike is an actual possibility during an interview yesterday evening broke the ice. The influential French ECB governor Villeroy in a speech this morning didn’t want to “preclude the next few Governing Council meetings” for a rate liftoff, implicitly leaving the option of June open. He also said that a too-weak euro would go against the inflation target. It suggests the ailing currency and its implications for inflation is getting noticed by Frankfurt. It’s time to act, sooner rather than later. Slovenian ECB governor Vasle believes so too, saying the appropriate time for a rate hike is “before the summer”. On a sidenote, ECB’s president Lagarde is due to speak in Slovenia next week. European assets in any case picked up the idea. Swap yields shot up by 9 bps. The euro rebounded from an intraday low sub 1.05 to test the 1.06 big figure. A break did not materialize though as nothing in the April US payrolls report today suggested the Fed can take it down a notch or two. It kept EUR/USD (1.058) in check via the dollar side of the equation. Sure, wages grew a less-than-expected 0.3% m/m (to be up 5.5% y/y) but it came on the back of an upward revision last month. Job creation (428k) meanwhile surpassed the bar with ease. The participation rate dropped from 62.4% to 62.2% while the unemployment rate stabilized at 3.6%. Markets expected a rise in the former and a slight decline to the 50-year (!) low by the latter. All things considered, this is still a red hot labour market begging for a cooldown. US yields quickly erased a knee-jerk move lower (on the wages data) to trade up to 5.5 bps (30y) higher, supported by real yields (+6.5 bps in the 10y). It also renewed momentum in EMU yields which were fading going in to the payrolls. Swap yields are 2.4 (2y) to 6.5 bps (10y) higher. Germany’s 10y yield extends is trip above 1% (5.2 bps). US stocks reacted negatively in futures trading to the report and open with follow-up losses of almost 2% (Nasdaq) after yesterday’s whammy. European equities slide up to 1.8% in the EuroStoxx50.

• Sterling remained under pressure in the wake of the Bank of England’s messy message of tightening vs souring growth expectations. Chief economist Pill struck a hawkish note, mainly touching on upside inflation risks but it was in vain. Sterling bears eat bulls alive. EUR/GBP rises further north to 0.858 – the highest level since December ’21. Cable (GBP/USD) lost important support at 1.2495/25 yesterday and declines further to 1.233 today. Next week UK GDP Q1 numbers are due. It may well be the last decent reading for quite some time.

News Headlines

• Canada published its April labour market statistics. Momentum in the Canadian labour market eased after impressive job growth in March and February. Net employment rose 15.3k vs 40k expected. The unemployment rate declined from 5.3% to 5.2%, the lowest since 1976. However, the participation rate declined slightly to 64.3%. A lack of available employees might have been in play. The average hourly wage rate also disappointed at 3.4% from 3.7%. Last month the Bank of Canada raised its policy rate by 50 bps to 1.0% and started reducing its balance sheet to arrest inflation that moved well above the 2.0% target (6.7%). Aside from external factors, the BoC said the domestic economy is moving into excess demand, with the tight labour market causing further wage increases. Today’s data probably won’t change the BoC’s assessment, allowing it to continue with hikes of 50 bps (or more) at the next policy meeting on June 1. The Canadian dollar recently suffered from the risk-off and a stabilization in some commodity prices and lost further ground after the release. USD/CAD trades near 1.287.

• According to a Czech news website, Czech central bank board member Ales Michl is likely to be appointed as the new CNB governor to replace Jiri Rusnok. His term will end on June 30. The CNB governor has to be appointed by the Czech president, Zeman. For now there is no official confirmation. Michl is an ultra-dove within the Czech MPC and was opposed the aggressive hiking campaign as he considers most of the inflation as external in nature. The koruna declined after the headlines appeared. EUR/CZK rose from 24.55 around noon to currently trade near 24.8.
 

Graphs & Table

USD/CAD: loonie loses marginally amid risk-off and easing, yet still strong, job growth.

Long end of the US curve underperforms with 30y testing 3.2% resistance (2015-2018 multiple tops).

European swap yields jump with 10y yield setting new cycle high on string of ECB comments arguing for June hike.

Nasdaq again under pressure after a 5% hit yesterday, testing support in the 12200 area. Sell in May and go away.

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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