Sunset

Thursday, February 10, 2022

Daily Market Overview

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Markets

• The European Commission’s Winter 2022 economic forecasts were today’s appetizer in the run-up to January US inflation numbers. The EC updated the 2021 growth figure to 5.3%, triggering mechanical revisions to the 2022 (4% from 4.3%) and a lesser extent 2023 (2.7% from 2.4%) predictions compared to the Autumn 2021 release. The balance of risks to the growth outlook is broadly even. The EC shifted its inflation path significantly higher: 2.6%-3.5%-1.7% for the 2021-2023 period, coming from 2.4%-2.2%-1.4%. The inflation projections are subject to upside risks if cost pressures are passed on from producer to consumer prices to a larger extent, increasing the likelihood of strong second-round effects. Risks to the growth and inflation outlook are aggravated by geopolitical tensions in Eastern Europe. Inflation forecasts probably remain on the lower side of the spectrum. The ECB in December projected 3.2% for 2022 and 1.8% for 2023 and last week labelled these as outdated. An internal debate is also ongoing about the accuracy of the inflation model given last year’s continuous underestimation of both inflation peak and period over which inflation would exceed the ECB’s 2% inflation target.
 
• US inflation again beat forecasts, rising by 0.6% M/M for both headline and core inflation to 7.5% Y/Y and 6% Y/Y respectively. The price rise was broad-based with heavy-weight categories like housing (5.7% Y/Y), food & beverages (6.7% Y/Y) and transport (20.8% Y/Y) showing significant increases. The strong underlying momentum suggests that this isn’t the headline inflation peak yet (because of higher petrol prices in February). In spite of all downplaying efforts by Federal Reserve officials off late, the multi-decade high inflation print strengthens market conviction that the Fed’s rate lift-off will be a 50 bps one. Selling resumes in US Treasuries, bear flattening the curve. US yields add 10.7 bps (2-yr) to 3.1 bps (30-yr). The US 10-yr yield was a whisker away from piercing above the psychological 2% mark for the first time since July 2019. German Bunds followed US Treasuries lower though the curve steepened, adding up to 4 bps in the 5-yr to 10-yr bucket. The US dollar profits from the beneficial relative yield dynamics with EUR/USD sliding back below the 1.14-handle for the first time since the ECB pivot. USD-gains could have been bigger though. USD/JPY tests the cycle and multi-year high at 116.35. The trade-weighted dollar tries to regain the 96-handle. US stocks sell-off in lockstep with bonds (-1.5%).
 
News Headlines

The Swedish Riksbank (RB) left the policy rate unchanged at 0%. It didn’t signal any imminent recalibration of its accommodative policy stance. The RB wants to keep the holdings of its asset portfolio to remain approximately unchanged in 2022 and before decreasing them gradually. Three governors preferred a faster reduction of asset purchases. The Riksbank expects a first rate increase only in H2 2024. Swedish CPIF inflation printed at 4.1% in December but this is entirely explained by electricity and fuel prices. Inflation should drop to just over 1% end 2022 and return to 2% mid next year. Inflation excluding energy prices is holding close to 2%. The risk of too low inflation has decreased but it still remains. The Krona lost modest ground to currently trade in the EUR/SEK 10.47 area.
 
• The ECB announced that it won’t extend the capital and leverage relief for banks which was put in place in 2020 and 2021 in order to help them to continue lending to households and business. In this respect the ECB confirmed ‘the initially envisaged timeline for a return to a normal supervision of banks capital adequacy and leverage’. In concreto, banks are again expected to operate above the Pilar 2 guidance from January 2023. Banks also will have to reinclude central bank exposure in the leverage ratio from April 01 2022. The ECB assessed that banks, even considering the uncertainty regarding the impact of the pandemic, have ample headroom above their capital requirements and above the leverage ratio requirement. End of September 2021 the aggregate Common Equity Tier 1 ratio of banks under direct ECB supervision stood at 15.47%. Their aggregate leverage ratio stood at 5.88%.
 

Graphs & Table

EUR/USD drifts back below 1.14 handle for the first time since ECB pivot

US money market discounts 1% Fed policy rate by July meeting

US 10-yr yield: inches away from 2% following umpteenth inflation beat

EUR/SEK: Riksbank doesn’t blink after ECB-turn. SEK suffers

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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