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Sunset Market Commentary


And it’s back to the drawing board for the ECB. Less than 24 hours after their “dovish” 75 bps rate hike, they faced runaway inflation numbers in Germany (1.2% M/M & 11.6% Y/Y), France (1.3% M/M & 7.1% Y/Y), Italy (4% M/M & 12.8% Y/Y) and Belgium (2.37% M/M & 12.27% Y/Y) for the month of October. Next week we’ll see 5%+ and 10%+ for EMU core and headline CPI, obviously both EMU records. Spanish inflation was exception to the rule at 0.1% M/M and 7.3% Y/Y. Today’s inflation readings forced ECB governing council member Simkus into admitting that December inflation forecasts will be revised up again. September ECB projections stood at 8.1% for this year, 5.5% for next and 2.3% for 2024. Following upward surprises for the month of September and now October, they effectively are outdated. He doesn’t want to call 75 bps rate hikes the new norm, but argues in favour of another substantial move in December. Inflation is simply too high and policy still expansionary. We’re on Simkus’ line and go for another 75 bps move in December compared to 50 bps discounted in EMU money markets. We see the ECB policy rate peak easily passing 3% next year. Other ECB governors stressed the need to continue hiking early 2023 to and beyond the neutral rate. A concept Slovak ECB member Kazimir interestingly compares to a runaway train.

This week’s core bond correction higher ended already after today’s very first regional German inflation print ahead of the opening bell. We’ve moved south throughout the day. German yields add 20 bps (5-yr) to 12 bps (30-yr) on a daily basis. The EU 10y swap rate rises by 16 bps and returns above the 3% mark following a brief spell below. 10-yr yield spreads vs Germany widen by 4 bps, which is only a small part of yesterday’s 17 bps tightening. US yields rise by more than 10 bps for the 2-5yr sector and 4.5 bps at the very long end. While we remain bearish on bonds medium term because of much more aggressive view on central bank actions than currently discounted, we are cautious short term. We expect the Fed to hike its policy rate next week for a fourth consecutive time by 75 bps with Powell clearly stating a slower tightening pace going forward. Unlike the ECB, we thus believe it could really be a dovish 75 bps rate hike which at least in the short run introduces a consolidation period for bonds. On FX markets, EUR/USD today failed to regain parity despite the bounce back in yields.

News Headlines

Hungarian prime minister Orban said the government is considering to further expand the list of products with centrally regulated prices in coming weeks. Measures currently in place span from staple goods including pork, cooking oil and flour to prices at the pump for as long as necessary. The Orban administration has also put an interest rate cap on household mortgages and announced last week that it will expand that mechanism to corporate credit (7.8% from November 15 to July 1 for SMEs). Orban said “it’s not a good thing” when a government needs to interfere in the economy but he said steps need to be taken to slow inflation.

National Bank of Belgium data showed the Belgian economy contracted by 0.1% q/q in the third quarter of this year. Compared to the same period last year, the economy was still 1.6% bigger. The numbers for Q2 were revised upwards though, from 0.2% q/q to 0.5% and from 3.3% y/y to 4.1%. Value added in the industry declined sharply, by 0.7% q/q. Services growth decelerated to 0.1% while construction rose 0.3% – similar to Q2. Belgium’s statistical office reported inflation accelerating from 11.27% to 12.27% in October on the back of a sharp 2.37% m/m increase. Core inflation (ex food and energy) rose too, from 6.21% to 6.5%. Among the biggest contributors to the biggest price pressures since June 1975 were housing, water, electricity, gas and other fuels (5.93 ppts), food (+2.27 ppts) and transportation (1.73 ppts).

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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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