Markets

US equities suffered a violent sell-off yesterday. Investors especially targeted the Nasdaq (-2.51%). The tech-heavy stock index is sensitive to (expectations of) higher rates. This is probably what drove Thursday’s move. In her Fed chair nomination appearance before the Senate, Brainard held a particular focus on inflation and became the latest governor to advocate a March rate hike. Being one of the biggest monetary doves within the committee, that marks a big shift. She said inflation is expected closer to 2.5% end this year but admitted these projections should be taken with caution. Fed’s Waller later said three rate hikes is still a good baseline for this year though added that if inflation stays high it could be four or even five. He currently doesn’t favor a 50 bps hike in March but the word is officially out. Waller said shrinking the balance sheet could start by summer. US bond yields stuck to their ST downward momentum, perhaps helped by further easing PPI figures suggesting supply-side inflationary pressures may have peaked. The curve flattened with changes ranging between -2.6 and -4.5 bps. German yields eased 1.2 bps (2y) to 4.7 bps (30y). ECB VP de Guindos warned inflation may not be as transitory as earlier thought. His comments were largely ignored though. EUR/USD closed a tad higher, just south of 1.146 resistance, mainly on continued yet marginal dollar weakness. DXY held below 95. The Japanese yen and Swiss France outperformed. Sterling eased but EUR/GBP remains trapped near recent 2-year lows (0.835/6).

A Japanese shocker. Reuters reported the central bank is debating how to start communicating on a possible interest rate hike. While not imminent, that may come even before inflation reaches its 2% target. Japanese bond yields increase 1-1.6 bps across the curve with the short to medium segment trading near or at the highest level since the introduction of negative rates in early 2016. In other central bank news, South Korea hiked for a third time (see headline below). Asian-Pacific stocks drop with both Japan and SK underperforming. The dollar is under pressure on FX markets, JPY and NOK take the lead. Core bonds retreated from yesterday’s rally.

US retail sales and U. of Michigan consumer sentiment put Joe Sixpack in the spotlights. Brainard yesterday said they are “hearing from working families” about inflation. It may indeed have affected spending and confidence. Combined with some cautiousness ahead of the long US weekend (Martin L. King Day), we don’t expect the current upward yield move in Asian dealings to go very far. The US 10y does find support relatively soon at 1.70%. For the German 10y support lies at -0.10%/-0.117%. EUR/USD’s techniques have improved a bit today as well by currently capping 1.146. A close above 1.1495 would be a nice plus for the currency pair.

News headlines

The Bank of Korea conducted its second consecutive 25 bps rate hike this morning – the third since August – raising the policy rate to 1.25%, matching the pre-pandemic level from Q4 2019. BoK Governor Lee Ju-you said that inflationary pressures will be much larger than earlier expected (a considerable amount of time over 3%) while uncertainties surrounding the pandemic are unlikely to derail the domestic economic recovery. BoK Lee thinks of monetary policy as still being accommodative, adding that another hike wouldn’t amount to tightening. Lee’s term as governor ends after the Feb 24 policy meeting. South Korean FM Hong Nam-ki announced an extra budget (to be funded by debt issuance) ahead of the BoK meeting, also giving more leeway for additional monetary policy tightening. The Korean won didn’t really profit from today’s decision with USD/KRW stable near 1187.

EU justice commissioner Reynders told the FT that the EC will demand from Poland to pay €69mn in accumulated daily fines since early November. If Warsaw doesn’t comply, the EU intends to withhold more than €100mn from EU payments to Poland to cover those unpaid running fines (+interest) imposed by the EU’s Court of Justice. Separately, the EC is also moving to withhold around €50mn of fines with regard to another legal dispute involving Poland and the Czech Republic. The latter complained about illegal Polish operations at a lignite mine. The zloty yesterday lost some ground against a strong euro, but EUR/PLN remains near the recent lows at 4.54.

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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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