KBC Sunset Market Commentary 14/01/2025 via Trader Talent

KBC Sunset

Tuesday, January 14, 2025

Daily Market Overview

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Markets

• Yesterday’s Bloomberg story brought some relief to markets. The news company citing people familiar reported that president-elect Trump’s team is working on a phased introduction of import tariffs. Raising levies 2%-5% each month instead of everything all at once reduces its shock effect both on US inflation and exporting areas, including the EU. The article shouldn’t be taken by face value though. A previous report by the Washington Post about a targeted tariff approach on a product level was quickly rebuffed by the present-to-be. Lacking such denial for the time being, however, and helped somewhat by lower-than-expected US PPIs, that eased the upward pressure on (US) bond yields, Euro area stocks rise about 1%, Wall Street between 0.4-0.9%. Producer prices were flat to +0.2% higher in December, depending on the gauge. This compared to a consensus estimate varying between +0.3-0.4%. With tomorrow’s more important consumer price inflation on the agenda, it triggered a kneejerk reaction lower in short-term US bond yields. Net daily changes vary between -1.4 (2-yr) to +1.4 bps (30-yr). European yields overcame morning weakness to trade slightly higher in a bear steepener. Long-end underperformance remains the name of the game since the short end is more or less locked in. A reasonable 100 bps of additional ECB easing is discounted. Swap yields add up to 5 bps. Maturities from 10-yr on hit new multi-month highs. The beginning-of-the-year bond market taps continue to be in high demand. A dual tranche European offering consisting of a new €6bn 3-yr benchmark and a €5bn Oct2054 tap attracted a combined €170bn. Books for Greece’s €4bn 10-yr syndicated sale ran above $40bn. Oil prices fluctuated near their 5-month highs (Brent +$80 per barrel) amid cease fire talks between Israel and Hamas reported to be in their final stages. Currency markets trade mixed with sterling the noticeable underperformer. Chancellor Reeves sought to reassure markets by repeating a pledge to stick by her own fiscal rules “at all times”. GBP investors send the currency nevertheless lower against the euro (EUR/GBP >0.84) and the dollar (GBP/USD 1.215, on track for its lowest close since October 2023). EUR/USD trades around the recent lows of 1.025.

News & Views

• Inflation in Hungary accelerated more than expected in December, surpassing the upper limit of its 3.0% +/- 1.0% MNB tolerance band. Price rose 0.5% M/M and 4.6% Y/Y, up from 3.7% in November. The rise was mainly due to higher prices for food (0.4% M/M), gas and electricity (1.7% M/M) and durable goods (0.6% M/M). Services prices stay elevated at 0.4% M/M and 6.8% Y/Y. The National Bank of Hungary’s core inflation measures all rose on a Y/Y year basis compared to November to between 4.7% and 5.4%. The NMB in its December inflation update indicated that inflation could rise to 4.6% Y/Y in January. With this level already reached in December, the risk is the hoped-for 2025 disinflation process will start from a higher level. The MNB in December also raised its 2025 inflation estimate to 3.3%-4.1% before returning sustainably to 3.0% in 2026. The MNB since end-September kept the policy rate unchanged at 6.50%. Current inflation data and the still-weak forint suggests that there is no room to restart easing anytime soon. The 2-y swap adds 5.0 bps (6.67%) and the 10-y also moves further north (+6.0 bps at 7.16%). The forint gains modestly from the EUR/HUF 413 area to currently 411.9, but this is rather due to global sentiment.

• The National Federation of Independent Business (NFIB) sentiment indicator among small US business improved further in December. The index rose 3.4 points to 105.1 after already having jumped at the fastest pace on record in November. It’s the highest reading since October 2018. “Optimism on Main Street continues to grow with the improved economic outlook following the election,” NFIB Chief Economist Bill Dunkelberg was quoted. “Small business owners feel more certain and hopeful about the economic agenda of the new administration. Expectations for economic growth, lower inflation, and positive business conditions have increased in anticipation of pro-business policies and legislation in the new year.” Of the 10 index components, seven increased. The uncertainty index declined substantially for the second consecutive month. Amongst others, the net percent of owners expecting the economy to improve rose 16 points to a net 52%, the highest since Q4 of 1983. Both the percentage of owners expecting higher real sales to rise and believing it is a good time to expand business rose to the highest level since early 2020. 20% reports inflation is their single most import problem, unchanged from November.