Wed, Mar 29, 2023 @ 12:53 GMT
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Sunset Market Commentary


Core bonds consolidated in a narrow range today with German Bunds slightly outperforming US Treasuries. Improving European risk sentiment didn’t weigh, neither did a stronger WS opening on the back of strong Q1 earnings (Netflix, Goldman Sachs and Johnson & Johnson). Eco data were mixed with disappointing German ZEW investor sentiment, but better than forecast US housing data and US industrial production. SF Fed Williams, who replaces Dudley at the helm of the NY Fed in the near future, sounded in favour of a gradual rate hike path. He added though that the Fed closely watches inflation with wages ratcheting up and that the eco outlook is very positive. His comments suggest that, if any, he is keeping the door open to more than 2 additional hikes this year. German yields decline between -0.5 bps (2-yr) and -1.3 bps (5-yr) at the time of writing. US yields add 1.3 bps (2-yr) to 0.7 bps (30-yr), marginally bear flattening the curve.

Dollar weakness prevailed of late as markets pondered the consequences of geopolitical uncertainty and of the trade dispute between the US and China. Euro skepticism rather than dollar doubts returned to the forefront today. German ZEW confidence disappointed again. Especially the sharp decline of the expectations component was a good reason for euro longs to become more cautious. At the same time, recent Fed comments can be considered as slightly USD supportive. Even dovish members continue to support the scenario of policy normalization as set out at the March meeting/dots. EUR/USD filled offers in the 1.2410/15 area this morning, but in two waves returned to the 1.2350 area. The gain of USD/JPY remains modest. The pair trades in the 107.10 area. In a broader perspective, both cross rates are still in consolidation modus. The scenario of an acceleration of USD losses (especially against the euro) looks to be rejected, at least for now.

Sterling extensively tested key resistance against the euro (EUR/GBP 0.8650 area) and the dollar (Cable 1.4345 previous top) over the previous days. It looked that sterling longs would be able to force a break, especially against the dollar. UK labour market data didn’t provide a clear trigger. The unemployment rate declined to 4.2% and job growth was as expected. However, (headline) wage growth (2.8% Y/Y vs 3.0% Y/Y expected) was marginally softer than expected. The impact on sterling was modest. The decline of EUR/GBP slowed temporary, but the pair dropped back to the 0.8630 area on overall euro softness later in the session. In the same move, cable dropped off the intraday top (1.4375 area) and trades currently in the 1.4325 area. This setback was partially GBP softness after the labour market data, but mirrored even more the intraday USD rebound. The UK CPI (tomorrow) and to a lesser extent the March UK retail sales (Thursday) might contain some additional clues for sterling trading.

News Headlines:

April German ZEW investor sentiment disappointed. The headline index declined from 90.7 to 87.9, marginally below 88 consensus, but the forward looking “expectations” index crashed from 5.1 to -8.2, the weakest reading since November 2012 (-1 expected). The setback probably reflects fears over global trade and signals that the German growth peak could be behind us.

Turkey’s government said it’s considering a request from a leading ally to bring forward landmark presidential and parliamentary elections to August 26 from November 2019. The Turkish lira felt new selling pressure with EUR/TRY spiking from 5.06 to 5.11.

The IMF predicts the strong world economic upswing will continue for the next two years (3.9%; unchanged from January forecast), but warned the seeds of its demise have already been planted. The fund raised the US growth outlook by 0.2 percentage points both this years and next, to 2.9% and 2.7% respectively.

KBC Bank
KBC Bank
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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