Wednesday, February 9, 2022

Daily Market Overview

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• Trees don’t grow to sky. Even interest rate markets today took a breather as the combined effect of an ECB policy U-turn and strong US payrolls is apparently ‘discounted’. For now, it’s still nothing more than a pause, not a real correction, with tomorrow’s US inflation data a potential catalyst for further directional price action for bond markets. Central bankers’ comments don’t question the need for policy normalization, but don’t feel the need to push markets even further either. BoE’s chief economist Pill doesn’t rule out 50 bps steps but for now advocates a step-by-step approach as the outlook for wages and energy prices is highly uncertain. ECB’s Nagel confirmed that the ECB needs to recalibrate monetary policy in March if the inflation picture and above all the inflation outlook hasn’t significantly brightened by then. This shouldn’t be new for markets. At the same time, Nagel also warned for the risks/side effects of asset purchase programs. The jury on this topic is still out, but any (substantial) steps on the ECB reducing its balance sheet probably aren’t discounted by markets yet. Fed Bostic is still balanced between 3 and 4 rate hikes this year. He hopes for a gradual decline in M/M inflation readings in the near future to bring the PCE deflator to 3.0% by the end of the year. Still, he doesn’t exclude a 50 bps hike if the data would signal it to be appropriate. Bostic also advocates a substantial reduction of the balance sheet starting as soon as possible as he sees a lot of excess liquidity that can be reduced without representing a significant tightening. As indicated, today comments didn’t change the broader picture on policy normalization but didn’t prevent a limited countermove. US yields are developing between little changed (2-y) and easing 2.5 bps (10-y). This evening the US Treasury will sell $ 37 bln of 10-y Notes. On European interest rate markets the steepening trend continues, this time with the short end taking the lead. The German 2/5-y yields are easing 4.5 bps. The 30-y declines a more modest 0.75 bps. The relative calm on core bond markets for now brings only little relief for peripheral European bond markets with the 10-y Italian spread versus German easing no more than 2 bps. The pause in the bond market sell-off also revives some comfort among equity investors. European indices on average are rising about 1.75% (EuroStoxx). US indices continue yesterday’s comeback opening with gains of about 1.0%. (Brent) oil  ($91.1 p/b) stays off its recent peak, but for now with no follow-through price action.

• Despite substantial moves on bond and equity markets, changes in the major FX cross rates mostly are limited. DXY index eases to 95.50. EUR/USD is holding north of 1.14 but at 1.1430 gains are negligeable. The risk-on for now still doesn’t help sterling (cf Pill comments?). EUR/GBP is going nowhere holding in the 0.8430 area.

News Headlines

• UK Prime Minister Johnson has announced he’ll end this month the requirement for people in England to self-isolate if they test positive for the coronavirus. It’s part of the government’s “Living with Covid” strategy – to be announced February 21 – and it is subject to the continuation of currently declining Covid statistics. The self-isolation obligation was due to end on March 24. By shelving the rules earlier, Johnson hopes to amend tarnished support from Conservative lawmakers who have been calling for easing restrictions amid concerns over individual freedoms and the impact on businesses, schools and health service.

• Mexican inflation eased less than hoped in January, from 7.36% y/y to 7.07% vs 7.01% expected. Core inflation, excluding a.o. fuel, even accelerated from 5.94% to 6.21%, the highest reading since 2001 and way above the 3% (+/- 1ppt) inflation target of the central bank (Banxico). Its new governor Victoria Rodriguez Ceja faces a difficult balancing act when the MPC meets for the first time this year tomorrow: tighten policy and tame inflation but risk hurting already stalling growth (-0.1% q/q in Q4 2021). Banxico started its hiking cycle in June 2021 and raised policy rates from 4% then to 5.50% today. Consensus expect another 50 bps increase tomorrow. The Mexican peso strengthens marginally today, from USD/MXN 20.61 to 20.55.

Graphs & Table

German 2-y yields eases, steepening the yield curve further.

EuroStoxx 50 rebounds, leaving key support levels intact.

DXY (TW USD index): dollar fails to regain traction

EUR/PLN: zloty extends gains as Governor Glapinsky holds a hawkish tone and applauds zloty strength.

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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