KBC Sunset Market Commentary 12/12/2024 via Trader Talent

KBC Sunset

Thursday, December 12, 2024

Daily Market Overview

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Markets

• The ECB as expected lowered the policy rates by 25 bps to 3% (deposit). The ECB will no longer reinvest some of the maturing PEPP bonds, allowing for a natural roll-off of the pandemic bond portfolio in fashion identical to APP. The central bank in its statement said disinflation is well on track. CPI forecasts for this year and the next were marginally revised down to 2.4% and 2.1%. The 2026 projection was left unchanged at 1.9% and the first estimate for 2027 came in at 2.1%. Core inflation for 2025 is seen at 2.3% (unch) and at 1.9% for both 2026 (-0.1 ppt) and 2027. Inflation is thus expected to be very close to target over the policy horizon. These projections are based on ECB market expectations probably dating from around mid-November (cut-off date). Easing bets have increased even further since with an even-lower terminal rate of between 1.5-1.75%. Growth forecasts were bleaker than in September. The economy would expand between 1.1-1.4% over 2025-2027 with the hoped-for recovery still assumed to arise from rising real incomes (supporting consumption and investment). President Lagarde noted the latest data suggest slowing momentum and firms holding back investment amid uncertainty. Growth risks are tilted to the downside. The combination of desinflation and sluggish growth led the ECB to scrap a pledge “to keep policy rates sufficiently restrictive for as long as necessary”. It suggests more cuts are coming although the ECB does not pre-commit to anything. Neither would Lagarde give a flavour of where she thinks the neutral rate is located. It probably served as quid pro quo for policymakers that wanted a bigger (50 bps) rate cut today. Asked whether it was discussed, Lagarde said it’s not yet “mission accomplished” on inflation. Services prices is preventing policymakers to feel totally confident. The ECB did not (yet) return to a forward-looking approach as suggested by chief economist Lane a few weeks ago but sticks to a data-dependent strategy. Markets react stoic. The ECB meeting does not change a lot to expectations going forward with 25 bps cuts priced in for the next several meetings. Front-end European yields soon reversed a knee-jerk dip lower. European swap yields even rise between +2.2 bps (2-yr) to +3.8 bps (30-yr). The euro trades a tad lower against most G10 peers. EUR/USD eases towards 1.048 vs yesterday’s close just south of 1.05.

News & Views

• The Swiss National Bank unexpectedly accelerated its easing cycle with a 50 bps rate cut to 0.50%. Underlying inflation decreased further and the SNB stands ready to adjust monetary policy if necessary. That’s a subtle, but important change from the promise of “further cuts” in September. We see it as a reckoning of the limited remaining policy space which argues in favour of a more gradual approach/end game going forward. SNB chair Schlegel at the press conference said that they would tolerate inflation dropping below the lower bound of the 0%-2% inflation band if it is deemed temporary. He also thinks that the likelihood of negative rates has become smaller. The new conditional inflation forecast (on a 0.5% policy rate) was lower than in September (1%) with CPI expected to average 1.1% this year (from 1.2%), 0.3% next year (0.6%) and 0.8% in 2026 (0.7%). Inflation prognosis would have been even lower if it weren’t for today’s cut. The central bank anticipates growth of around 1% for the current year and between 1% and 1.5% for 2025. The SNB repeats its willingness to be active in the FX market as necessary to counter the impact of a historically strong Swiss franc, though policy rate cuts continue to be the main instrument for any potential further policy easing. EUR/CHF rose from 0.9280 to 0.9340 in a first reaction, but the changed SNB-tone erased those gains somewhat.
• The International Energy Agency published its monthly oil market report. World oil demand is set to accelerate from 840k b/d (from 921k previously) to 1.1mn b/d in 2025 (from 990k), lifting consumption to 103.9mn b/d. The increase will be dominated by petrochemical feedstocks. Geographically, emerging Asia continues to lead gains. The IEA’s oil demand growth forecasts remain significantly below the OPEC ones. The cartel earlier this week prognosed 1.6mn b/d growth this year and 1.4mn b/d for 2025. The IEA said that the decision by OPEC+ to delay the unwinding of its additional voluntary production cuts by another three months and extend the ramp-up period by nine months through September 2026 has materially reduced the potential supply overhang that was set to emerge next year. Total oil supply is on track to increase by 630k b/d this year and 1.9mn b/d in 2025, to 104.8mn b/d. Brent crude prices hover between $70/b and $75/b since mid-October.