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• We’ve started the day with UK March inflation numbers spiking to a 30-yr high of 7% Y/Y, with the peak not yet in place. The unexpected fresh acceleration strengthens market thinking that the Bank of England won’t be able to pause its tightening cycle this year to avoid amplifying the developing cost-of-living crisis. A May 5 25 bps rate hike is fully discounted with more and more investors betting on a larger 50 bps move as global central banks following the Central-European example of stepping up the tightening cycle. The Reserve Bank of New Zealand this morning provided the latest evidence by lifting the policy rate from 1% to 1.5%. UK Gilts underperform US Treasuries and German Bunds. The UK yield curve bear steepens today with yields adding 1.7 bps (2-yr) to 3.6 bps (20-yr). Sterling showed no immediate response, but EUR/GBP is drifting south in lockstep with EUR/USD going into tomorrow’s ECB meeting. The pair trades around 0.8315 with first intermediate support around 0.8308/0.8296. Today’s eco calendar had little more to offer apart from -surprise, surprise – an acceleration of US producer prices in March (1.4% M/M and 11.2% Y/Y). Yesterday’s general market trends in Europe/US just continued in these setting. Especially US Treasuries gain some additional relieve (at the front end) in a move that started after the March US CPI release. The US yield curve bull steepens with yields dropping by 11.6 bps (3-yr) to 0.9 bps (30-yr). German yield lose around 0.5 bps to 1.5 bps across the curve. Brent crude’s leap towards $107/b (from <$100/b yesterday morning) has no significant impact on bond markets. EUR/USD remains in the defensive despite this relative yield development as investors don’t want to be wrongfooted by ECB’s Lagarde tomorrow. The pair drifts towards the 1.0806 YTD low. The Japanese yen is probably today’s biggest victim from the higher oil price. USD/JPY moved beyond the 2015 high of 125.86 to trade above 126 for the first time since 2002. It prompted a verbal intervention from Japanese FM Suzuki who said that sudden moves in the FX rates are very problematic which the government will watch with great care. JPY wasn’t really impressed by this intervention hint.
• Leading German economic institutes in a collective assessment on the economy downwardly revised their growth forecast for the country to 2.7% this year from 4.8% in the autumn of last year. The downward revision was mainly due to the impact of the war in Ukraine. However, also a more negative development of the pandemic during the winter than previously expected caused a ‘lower starting’ point for this year’s growth. GDP growth is expected to accelerate to 3.1% next year up from 1.9% previously. Inflation this year is expected at 6.1% with prices rising another 2.8% next year. These forecasts assume that gas supply from Russia will continue and that there will be no further economic escalation related to the conflict. In a scenario of a complete stop of Russian gas deliveries, the institutes see economic growth slowing to 1.9% this year and an economic contraction of 2.2% next year. Such a stop would cost the German economy a cumulative loss of €220bn over 2022 and 2023 combined.
• According to a news topic at a state-run Television reported by Bloomberg the Chinese state council reiterated its commitment to use monetary policy tools including a reduction in the Reserve Requirement Ratio (RRR) in order to step up financial support to the economy, in particular industries and small business that are hit hard by the pandemic. This commitment of economic support comes as the economic outlook for Chinese growth worsens as lockdowns measures were put in place in several important economic centra including in Shanghai. This economic setback was also visible in the Chinese trade data this morning. Imports in March unexpectedly declined (-0.1% Y/Y in USD terms). The decline might both be due to logistic/transport disruptions because of the COVID lockdowns as well as the result of a slowdown in domestic demand.
Graphs & Table
USD/JPY trades above 126 for the first time since 2002
EUR/USD 1.0806: make or break at ECB meeting
EU10y swap rate flirts with 1.5% mark for second session straight
USD/CAD: loonie hardly gains as 50 bps rate hike today was fully discounted.
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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