KBC Market Research Desk
KBC Bank
Markets
Yesterday, markets further left behind last week’s financial stability concerns and returned to the order of the day. However, the eco calendar didn’t provide much high profile data to color the intraday dynamics. Markets basically build on the ‘normalization move’ from earlier this week. US yields maintained recent gains but in the end closed little changed (2 y +2.0 bps; 30-y -1 bp). About further rate hikes Fed Chair Powell, in a meeting with US House representatives, was said to have referred to the dots, penciling in one additional rate hike. A $ 35 bln 7-y US Treasury auction only drew modest investor interest (bid/cover 2.39 VS 2.49 average and 1.1 bps above WI yield). German bunds again slightly underperformed Treasuries with yields rising between 6.2 bps (2-y) and 3.5 bps (30-y). Chief economist Lane also reiterated recent ECB mantra that rates will have to be raised further under the ECB baseline scenario assuming only limited impact from recent financial turmoil. Relative calm on bond markets inspired a further equity rebound. Both US and European indices closed with solid gains (Euro Stoxx 50 + 1.51%, Dow +1.0%, Nasdaq +1.79%). On FX markets, the dollar showed no clear directional trend. DXY closed modestly higher near 102.64. EUR/USD finished the day unchanged at 1.0845. USD/JPY rebounded sharply from a close near 130.9 on Tuesday to 132.86 yesterday evening. Sterling lost a few ticks against the single currency but the EUR/GBP cross rates stayed in well-known territory near the 0.88 big figure.
Asian equity markets this morning show a mixed picture and fail to fully profit from yesterday’s strong momentum on WS. US yields gain marginally. The dollar still shows no clear trend (DXY 102.65, USD/JPY 132.6; EUR/USD 1.084). Today, markets will receive first important price data after recent financial turmoil with Germany, Spain and Belgium reporting first European March inflation data ahead of tomorrow’s EMU flash estimate. The EC also will published its monthly economic confidence data. (European) inflation data these days are often affected by the impact of domestic measures to support consumers’ purchasing power which might lead to an a-synchronic pattern between countries. However, the expected monthly dynamics (Spain 1.6%, Germany 0.8%), if it materializes, still might confirm recent evidence of stubborn underlying price pressures. This should support the case that the ECB has to continue its anti-inflationary campaign if financial stability concerns ebb further. For the German 10-y yield, 2.393% is next resistance on the charts (neckline ST double bottom). Data cementing the view that the ECB will (have to) continue its hiking cycle, probably well beyond the Fed reaching the peak in its campaign, might put a floor for the euro. EUR/USD 1.0930 remains final intermediate resistance before a return to the 1.1033 YTD top.
News and views
The Czech National Bank kept rates unchanged at 7% in a 6-1 vote with the dissenter voting for a 25 bps increase. Despite the risen uncertainty, the CNB is unwilling to ditch the possibility of further hikes. It also said that it considers market expectations regarding the timing of a first cut to be premature. The current policy level according to the CNB is dampening domestic demand with real household consumption falling for a fifth consecutive quarter. Investment growth is hampered by increased energy and commodity costs. On the other hand, Czech unemployment remains low. Inflation decreased to 16.7% in February and will fall further in coming months to hit single digits in 2023H2. It should fall close to the 2% target next year. The CNB Board identifies a series of risks going in both directions, including faster-than-expected wage growth or a weaker consumption and investor demand. The Czech koruna strengthened yesterday from EUR/CZK 23.63 to 23.56 after the CNB in the statement formally pushed back on rate cuts. Czech swap yields advanced up to 9.8 bps at the front end but the upleg already took place in the run-up to the meeting.
The US Federal Deposit Insurance Corp is facing a blow of almost $23bn in costs from the recent bank failures. To shore up the $128bn insurance fund, the agency is considering to pass through a larger-than-usual portion of the burden to the biggest banks, according to people familiar with the matter. The issue is a politically hot item with government officials publicly demanding regulators to spare small banks in the process of rebuilding the FDIC’s coffers.
This non-exhaustive information is based on short-term forecasts for expected developments on the financial markets. KBC Bank cannot guarantee that these forecasts will materialize and cannot be held liable in any way for direct or consequential loss arising from any use of this document or its content. The document is not intended as personalized investment advice and does not constitute a recommendation to buy, sell or hold investments described herein. Although information has been obtained from and is based upon sources KBC believes to be reliable, KBC does not guarantee the accuracy of this information, which may be incomplete or condensed. All opinions and estimates constitute a KBC judgment as of the data of the report and are subject to change without notice.
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