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Sunset Market Commentary


Core bond yields roared back after yesterday’s setback. The yield reversal already started during Asian dealings after Chinese inflation, both in CPI and PPI readings, bounced stronger than expected in March. It reminded investors of lurking inflationary pressures as a result of the fiscal and monetary efforts and ongoing economic reopening. That’s especially true for the US, where PPI figures for March already came in stronger than expected at 1% m/m or 4.2% y/y (vs. 0.5% and 3.8% expected). Core PPI also beat consensus but with little direct market impact. The narrowest of measures accelerated to 0.6% m/m (vs 0.2% foreseen) to bring the yearly figure to 3.1% (vs. 2.7%). All eyes are now on the CPI reading due next week. The US yield curve bear steepens going into the weekend and ahead of US supply next week. The belly underperforms. Yields climb 1.2 bps (2-yr) to 5.8/5.7 bps (5-10yr) over 4.8 bps (30-yr) despite Fed vice-chair Clarida trying to convince the remaining few that the Fed won’t raise rates until employment and inflation conditions are met. As such, first support in the US 10-yr yield at around 1.58% never really came into the picture today. German yields also jumped, erasing much if not all of this week’s losses. The curve shifts in similar fashion to the US with yields 1.7 bps (2-yr) to 4.5/5.1 bps (5-10yr) over 4.5 bps (30-yr) higher. Peripheral spread changes are marginal. Italy underperforms (+3 bps) despite country officials saying restrictions in most of the country will be eased in the near future. The BTP selloff is probably inspired by Italian PM Draghi bringing forward plans to borrow up to 40bn euros to keep much-needed support to the economy flowing.

UST underperformance helps the dollar to recover from yesterday’s losses. The greenback gains against all G10 peers except the Canadian loonie. CAD is benefitting from again a blowout payrolls report with a net job growth of 303k vs. 100k expected, a stronger-than-expected decline of the unemployment rate to 7.5% despite a rising participation rate (62.5%) that’s also closing in on pre-pandemic levels. EUR/USD retreats from 1.1914 to 1.187 currently. The currency pair is still up about 1% for the week. The rate-sensitive yen is ending a strong week on soft footing. USD/JPY nears 110 again, up from 109.27 this morning, in an almost perfect bullish engulfing move. On a trade-weighted basis (DXY), the US dollar rises from the low 92 area to 92.38. Sterling is marginally stronger today. EUR/GBP touched 0.87 but reversed course thereafter to change hands in the 0.866 area. A well-bid dollar does drag cable slightly lower.

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Hungarian headline inflation accelerated as expected from 3.1% y/y to 3.7% y/y in March. Fuel prices (0.6% m/m) and tobacco prices (2.1% m/m) were the main drivers. Going forward, we think that base effects and relatively higher oil prices will elevate headline inflation further in coming months, before returning in the MNB target zone (3% ±1 percentage point). Core inflation moderated in March from 4.1% y/y to 3.9% y/y and core inflation adjusted for indirect tax changes slowed from 3.4% y/y to 3.1% y/y. Current and expected (temporary) inflation trends suggest that the MNB won’t be lured into any preemptive monetary policy normalization. The forint didn’t react to the release, but at EUR/HUF 358 manages to hold on to this month’s gains.

Brazilian inflation surged to the highest level in over four years in March and at 6.1% y/y even is significantly above the upper end of the 1.5 percentage point tolerance band around the 3.75% year-end goal of the central bank (BCB). Runaway inflation suggests that the BCB will stick to its intention to follow-up on last month’s unexpected 75 bps rate hike move with a similar hike early May (3.5% from 2.75%). Today’s rise of USD/BRL above 5.60 represent general dollar strength, but perhaps also a feeling amongst investors that a 75 bps May move might be too little, too late for the BCB.

KBC Bank
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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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