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Sunset Market Commentary


UK markets apparently needed some time to let yesterday’s Bank of England meeting outcome sink in. Another 25 bps rate hike was accompanied by similar hawkish guidance that more could follow should inflation be more persistent. Bank of England Chief Economist Pill today already stressed that upside inflation risks remain. Despite an higher implied policy rate path and significantly lower energy prices, the BoE’s preferred model delivered upward revisions to February’s inflation forecasts. Average double digit inflation in Q1, a more resilient economy and the tight labour market are the key reasons. Q1 GDP data printed in line with forecasts this morning at 0.1% Q/Q with details showing flat consumption and investment growth (+1.3%Q/Q) compensating for a decline in government spending (-2.5% Q/Q) and net exports (-0.9% Q/Q). UK Gilts underperformed, reversing yesterday’s move. UK yields add 4.6 bps (2-yr) to 6.9 bps (30-yr) at the time of writing. EUR/GBP this week fell below 0.8719 support to set a new YTD low at 0.8661. An attempt to regain the lost support at 0.8719 failed for now with the pair currently changing hands around 0.87. A weekly close below improves the short term picture for sterling. Next week’s eco data releases (labour market data) could make or break the current GBP-comeback. Sterling holds pace with the dollar resulting in a 1.25 status quo for GBP/USD, holding just above the upward trendline in place since mid-March. One implication is an extension of the topping out pattern in EUR/USD with the pair trading below 1.09 for the first time in a month. The eco calendar didn’t contain EMU figures, but we retain comments by German Bundesbank chief Nagel on the sidelines of the G-7 meeting for finance ministers and central bankers in Japan. He said that ECB tightening might even be required after Summer. That’s at odds with current money market pricing of maximum two additional 25 bps rate hikes in June and July. Voting Fed member Bowman offered some hawkish counterweight by leaving the door open for more rate hikes despite last week’s pause signal. In her view, recent inflation and employment reports have not provided consistent evidence that inflation is on a downward trend. German Bunds today marginally underperform US Treasuries, but it doesn’t help the single currency. German yields add up to 3 bps at the moment with US yields only 1 bp higher. Main stock markets record small gains. Next week’s calendar is light when it comes to eco data (apart from US retail sales) while an avalanche of central bankers on both sides of the Atlantic sheds his/her view on future monetary policy. The US political deadlock on raising the debt ceiling will get more traction with default date (somewhere early June) rapidly approaching. The health of US regional banks remains uncertain as well.

News & Views

Norwegian mainland GDP rose 0.2% q/q in the first three months of the year. Growth was slightly more than the 0.1% consensus estimate, in part thanks to a solid March output rebound (0.5% m/m). But it comes with a downward revision of the 2022Q4 figure (0.6% vs 0.8%). Private consumption weighed (-5.1% q/q) as it normalized from a 5.6% surge in the previous quarter. A rise in (net) exports and government expenditures offered some counterbalance. Today’s numbers are also better than the 0.1% contraction forecasted by Norway’s central bank and follows the stronger-than-expected CPI numbers published earlier this week. The Norges Bank raised rates last week by 25 bps to 3.25%. The final 25 bps rate hike project for June (to 3.5%) looks too conservative, especially against the background of ongoing and historical Norwegian krone weakness (EUR/NOK today trades around 11.63). Money markets expect a policy rate of at least 4%.

G7 finance leaders during their three-day meeting in Japan discussed the need to make supply chains more resilient by reducing over-reliance on China, German finance minister Lindner said today. He added that building partnerships with low- and middle-income countries through investment and aid. In countering the rise of China though, parties are less aligned. The US is pushing for stronger steps, including targeted controls in investment but Japan and German are skeptical to the idea. The members also stressed the need for the US to resolve the debt ceiling impasse and discussed the health of the global financial system and measures to avert another digital bank run. The G7 summit concludes this Saturday and is followed by a G7 country leader reunion next week.

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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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