Thursday, July 28, 2022

Daily Market Overview

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• It was the bad-news-show today. First up: German inflation. The pre-market regional print in North Rein-Westphalia already suggested a nasty surprise and so it happened. The national number eased less than expected, from 7.6% to 7.6% in July. The harmonized figure even unexpectedly accelerated from 8.2% to 8.5%, suggesting upwards risks for the European reading tomorrow. Next: economic confidence (EC) in the euro zone. Confidence evaporated more than expected (from 103.5 to 99) to hit the lowest level since February last year. And finally: US GDP. Growth contracted -0.9% q/q annualized following the -1.6% in Q1, pushing the US in a technical recession. Private consumption decelerated, adding 0.7% to growth while net exports delivered 1.43% points thanks to a significant slowdown in imports but surging exports. Investments particularly weighed on growth (-2.73 ppts) due to depleting inventories while government consumption (-0.33 ppts) accounted for the remainder of the negative GDP reading.  All this was surrounded in a post-Fed atmosphere, with markets selectively taking note of Powell’s announcement that the tightening cycle may slow down from the 75 bps hiking pace from September onwards. Especially after the GDP release, markets saw their soft interpretation validated. Core bond yields surge with Bunds, despite the inflation surprise, even outperforming Treasuries. Changes range from -18.5 bps (2y) over 10.9 bps (10y) to 5.4 bps (30y). Peripheral spreads narrow 2 to 3 bps. Greece (+3 bps) underperforms. US yields shed 15-16.3 bps in the 2y/5y segment. Money markets price in a total of 90 bps additional tightening this year and lower the expected terminal rate to just 3.2%. The 10y yield (2.67%, -11 bps) drops below the sideways trading range with the lower bound at 2.72%. Tumbling yields provide some support for equities. European stocks extended a bottoming out to trade 0.6% in the green (EuroStoxx50). US futures did the same but turned red after all shortly after the cash open.

• There’s only one real beneficiary in current circumstances on FX markets. The Japanese yen shines, gaining against all G10 peers. USD/JPY drops to the lowest since early July around 134.8. EUR/JPY retraces to 136.93, testing support at the lows earlier in July. EUR/USD is a balance of weakness today which up until the GDP numbers was tilted towards the dollar. The pair hit a low at 1.011 before recovering a tad to 1.015 currently. The Swiss franc is on track for a new closing record high after the SNB reiterated that it can take monetary policy measures at any time if needed. EUR/CHF crumbles to 0.973.

News Headlines

• According to the flash estimate published by the National Bank of Belgium, Belgian GDP growth in Q2 slowed to 0.2 % Q/Q and 3.3% Y/Y. Growth in Q1 printed at 0.5 % Q/Q and 4.9% Y/Y. According to NBB the slowdown is widespread across the major branches of activity. Value added was down by 0.2 % in industry while in construction and the services sector, growth of activity remained positive, although slowed to 0.3 %. In a separate publication, STATBEL reported that Belgian inflation slowed marginally to 0.83% M/M and 9.62% Y/Y, compared to 0.85% and 9.65% Y/Y in June. Core inflation which doesn’t take into account energy products and unprocessed food, rose further to 5.49% Y/Y from 5.07%. Food price inflation rose sharply further to 9.24% from 8.44% Y/Y. Main price increases in July concerned airplane tickets, hotel rooms, fire insurance, meat, electricity, dairy products, domestic heating oil, the purchases of vehicles and road tax. Motor fuels, city trips, alcoholic beverages and private rents had a decreasing effect on the index.

• In its new inflation report, the central bank of Turkey again upwardly revised its forecast for inflation at the end of this year to at 60.4% (from 42%). Headline inflation was 78.62% in June. The CBTR expects inflation to ease to 19.2% end next year and 8.8% at the end of 2024. The CBRT still holds a policy rate of only 14.0%. At EUR/TRY 18.27 and USD/TRY 17.93 the lira again trades within reach of the historic low levels against both major currencies.


Graphs & Table

US 2y yield tanks as markets see their dovish Fed interpretation confirmed following GDP numbers.

USD/JPY testing first support zone as yen stands out today amid tumbling core bond yields.

USD/TRY. Or is it this Argentine peso?

Nasdaq struggles to build on yesterday’s euforic rise.

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). Read the full disclaimer.

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