Sunset

Wednesday, February 16, 2022

Daily Market Overview

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Markets

• Today’s trading session revolved around US retail sales. They came in much stronger than expected, even accounting for the 0.5-0.9% (depending on the gauge) downward revision of December. Headline sales rose 3.8% m/m vs 2% expected. The control group – a proxy for private consumption in GDP – soared 4.8%, crushing the 1.3% consensus bar. While Omicron probably damped spending, it clearly did so less than feared. 8 out of the 13 categories rose with motor vehicles, furniture and non-store sales surging the most. Eating and drinking is the only service-oriented bracket in the retail sales series and showed a 0.9% m/m decline. US bond yields hesitated for a few minutes before shedding a few bps shortly after. It was the easiest way to go after showing some fatigue earlier on the day and as a still-mild risk-off intensifies (EuroStoxx50 loses about 0.5%, WS opens up to 1% lower in the Nasdaq) going into US dealings on lingering geopolitical uncertainty. US yields decline 2.3-3.5 bps across the curve with the 10y trying to retain the 2% ahead of tonight’s Fed meeting minutes. German yields decline in sympathy with changes varying from -2.5 bps (2y) to 4.3 bps (10y). ECB heavyweight Villeroy this morning said APP net buying could end in Q3 but hinted at altering forward guidance to allow for more time for a first rate hike. ECB hawk Kazaks later said a rate hike is “quite likely” this year but framed markets positioning for two 25 bps hikes as “somewhat too harsh”. Interestingly though, markets refuse to rule out such a scenario. European swaps yields slightly outpace the decline of Bund yields, easing 2.6 to 4.6 bps in a bull flattening move. UK yields tank up to 13 bps even as CPI in January accelerated unexpectedly to 5.5% headline and 4.4% core. It suggests money markets currently expect more than enough action by the Bank of England. UK retail sales on Friday thus face an asymmetric market risk.
 
• There are no stand-out currencies in FX space today. The Canadian loonie takes first place with small gains vs all G10 peers following higher-than-expected inflation (see below). The USD and euro is a balance of weakness with the pair briefly touching minor resistance at 1.1386 before returning to opening levels around 1.136. The trade-weighted DXY is testing the 96 barrier. Sterling headed for the strongest levels vs the euro for the day while US dealings get going. EUR/GBP went from 0.839 to 0.837 at the time of writing.
 
News Headlines

The European court of Justice today ruled that the rule of law conditionality mechanism was legally solid and is in accordance with the treaties of the Union. The court dismissed challenges of Poland and Hungary against rules that would allow the Union to retain funding from members states that are breaking European laws. There is no appeal possible against this ruling of the ECJ. The ECJ found that the new law ‘respects in particular the limits of the powers conferred on the European Union and the principle of legal certainty’. The EU has disputes with multiple countries on compliance with its founding principles but it is expected that the mechanism might be used against Hungary and Poland in the near future. The loss of the zloty after the announcement of the ruling was modest (EUR/PLN 4.50). Forint losses were bigger with EUR/HUF rebounding from the sub 354 area to currently trade near 356.25.
 
• Headline inflation in Canada in January accelerated 0.9% M/M (non-seasonally adjusted) to 5.1% Y/Y, the fastest pace since September 1991 (was -0.1% M/M and 4.8% Y/Y in December). The outcome was also above market expectations. Price rises were broad-based with M/M gains of 1.4% for food, 0.5% for shelter, 1.3% transportation and recreation/education (1.3%) catching the eye. All of the BoC preferred core inflation measures also printed higher than expected. Markets were already positioned for the BoC to start hiking its policy rate at the March 2 meeting. Today’s data only confirm this lift-off scenario. The loonie gained modestly after the CPI release with USD/CAD currently trading in the 1.2690 area.

Graphs & Table

European 10y swap yield declines more than the Bund today. Short-term topping out as markets look for new catalysts.

USD/CAD: loonie “outperforms” in FX space today after higher-than-expected CPI.

Gold ($/ounce): geopolitical uncertainty outweighs recent rise in (real) yields.

Italian 10y yield tested 2% at European open but lacked momentum for a break higher.

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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