Tuesday, January 31, 2023

Daily Market Overview

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• European (Bond) markets this morning hesitated which card to play and this indecisiveness continued throughout the day . Risk-off sentiment spilling over from yesterday’s WS session initially helped bonds to rebound. However, European data (temporary) eroded bonds’ gains. French HCIP inflation rose 0.4% M/M to 7% Y/Y (from 6.7%), illustrating that the downward trajectory won’t be a straight, uninterrupted journey back to target. Growth for now is a secondary consideration in the ECB’s policy assessment. Even so activity in France unexpectedly rose 0.1% Q/Q while growth in Italy (-0.1% Q/Q) contracted less than expected. Despite yesterday’s negative surprise from Germany, Eurostat reported a 0.1% Q/Q positive Q4 growth (1.9% Y/Y) for EMU. Economic resilience at the end of last year and better prospects ahead at least make it easier for the ECB to hold to its strong anti-inflationary commitment as set out at the December meeting. After easing up to 6+ bps, German yields reversed most of the early decline. Bonds again captured a better bid as US investors joined. The US Q4 employment cost index eased more than expected to 1% from 1.2%. In volatile trading, German yields currently are ceding 2-3.5 bps, with the belly outperforming the wings (30-y trades little changed). US yields are easing 3.5 bps (5y) to 1.5 bps (30-y), awaiting Powell’s guidance/assessment on the recent easing in inflationary dynamics. European equites initially lost 0.75%, but the move petered out in afternoon trading. The EuroStoxx is currently ceding just 0.2%. US indices opened with minor gains. A further correction in the oil price (Brent $84/b) maybe added to the bond-friendly sentiment.
• The dollar followed the broader intraday moves in equities and bonds. The early session risk-off propelled the US currency, with EUR/USD filling bids just north of the 1.08 big figure. However, equities reversing most of their early decline forced the dollar to reverse course. EUR/USD again trades near 1.0850. DXY returned to the 102.25 area. A better risk sentiment intraday this time didn’t help sterling as investors are counting down to Thursday’s BoE policy meeting with an update of the bank’s economic assessment. EUR/GBP regained the 0.88 mark (0.8815). In Northern Europe, the sell-off of Scandinavian currencies continues as market expect regional central banks to come closer to the end of their hiking cycles. EUR/SEK at 11.37 is testing the weakest levels post corona for the Swedish Krone. EUR/NOK (10.92) cleared the early January top of 10.828, reaching the highest level since November 2020. The Norges bank today announced a bigger than expected amount of FX purchases (worth NOK 1 900bn/day in February) on behalf of the government linked to the Treasury’s management of oil revenues.
News & Views

• Czech GDP shrunk by -0.3% q/q in the final quarter last year. While less than the -0.6% expected, it’s the second quarterly contraction in a row, thus meeting the definition of a technical recession. In year-on-year terms, activity was a mere 0.4% higher compared to the same quarter in 2021. The Czech Statistical Office said gross capital formation expenditures as well as external demand supported growth. Private/final consumption, by contrast, was a drag. This is obvious from the sectoral (gross value added) approach too. Mainly industry was successful, the CZSO reported, whereas in trade, transportation, and accommodation and food service activities there was a decrease. The Czech koruna strengthens today, outperforming regional peers (EUR/CZK 23.79). But the move had little to do with the data print. CZK bulls clearly are keen to test the recent EUR/CZK (closing) lows around 23.71 (23.76) even as important central bank meetings loom later this week and risk sentiment isn’t all that great.
• Credit standards applied by banks in the final three months of 2022 have tightened by the most since the debt crisis in 2011, the ECB’s quarterly Bank Lending Survey showed. The central bank cited a number of reasons, ranging from general uncertainty around the economic outlook and firm’s situations over a declining risk tolerance to higher funding costs following Frankfurt’s aggressive rate hike cycle. The sharp increase in interest rates has also sapped loan demand, both from companies (all sectors except energy-intensive ones) as from consumers. In the latter category consumer credit demand was down strongly while mortgage requests dropped the strongest on record.

Graphs & Table

US 10-y yield struggles to leave the 3.5% area as markets await Fed guidance.

EUR/NOK: krone at weakest level against the euro since November 2020 as market ponder end of NB rate hike cycle.

EUR/USD: dollar rebound fails to capture momentum. First EUR/USD support near 1.0735 stays out of reach.

EUR/CZK: krone holding near multi-year top even as Czech economy entered technical recession

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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