KBC Sunset Market Commentary 15/01/2025 via Trader Talent

Daily Market Overview

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Markets

•          A minor downward surprise in the December US inflation report triggered an outsized market rally. It’s testament to current stretched market positioning rather than to really softening price pressure. US money markets arrived at the point where adding to the recent calibration would mean betting on a rate hike as a next Fed move rather than a rate cut. Even though we side with the view that there’s limited room left to lower policy rates further, we agree that it’s way too early to already turn that ship the Brazilian way. Turning to the inflation numbers, headline CPI accelerated to 0.4% M/M and 2.9% Y/Y (from 2.7%) as expected. The pace of underlying core CPI unexpectedly slowed down from 0.3% M/M to 0.2% M/M with the annual figure slowing from 3.3% to 3.2% instead of the expected stabilization. US Treasuries rallied with daily yield changes falling by 10 bps to 14 bps with the belly of the curve outperforming the wings. A next 25 bps rate cut by the Fed is now discounted by June rather than by end 2025. The dollar faced a setback but damage was contained as European bonds followed US Treasuries higher. EU swap rates cede 8 to 10 bps with the belly also outperforming. On top, from the euro side of the equation there’s still little to cheer on. Especially in anticipation of president-elect Trump’s inauguration this weekend which could result in an avalanche of immediate executive orders. EUR/USD went from 1.03 to 1.0350. EUR/GBP 0.8448 resistance survived even as UK Gilts received a double boost today. Apart from the US-CPI, we’ve also had lower December UK inflation numbers this morning. Headline, core and services inflation respectively slowed from 2.6% Y/Y to 2.5% Y/Y, from 3.5% Y/Y to 3.2% Y/Y and from 5% Y/Y to 4.4% Y/Y. UK Gilt yields crash 15 bps across the curve with a February BoE rate cut being all of sudden back into play. Vibrant risk sentiment is the dominant force here though. European stock markets currently gain 1%-1.5% with key US equity indices opening 1.5% higher as well. Apart from the goldilocks combination of stronger US payrolls and avoiding more price pressure, it’s worth mentioning the strong start to Q4 earnings season by US financials (Goldman Sachs, JP Morgan, Citigroup).
 

News & Views

•          First calculations by the German Federal Statistical Office (Destatis) learnt that the price adjusted gross domestic product (GDP) was 0.2% lower in 2024 than in the previous year. Ruth Rand of the Statistical office commented that “Cyclical and structural pressures stood in the way of better economic development in 2024.” From the gross value added point of view, activity in the economy contracted by 0.4%, with significant differences in the performance of individual economic sectors. Gross value added in manufacturing dropped significantly (-3%) The decline in valued added in the construction industry was even more pronounced at -3.8% due to higher prices for building products and interest rates remaining high. The service sector still registered positive growth overall in 2024 (+0.8%). However, here were also significant differences between subsectors (stagnation in the likes of trade, transport, accommodation and food services, but a better performance in gross value added in the information and communication sector, +2.5%). There was a steady rise in the sectors of the economy that are closely linked to general government (1.6%). In a demand approach, gross fixed capital formation declined 2.8%. Despite higher income, household consumption only rose 0.3%. Government consumption growth was much more pronounced at 2.6%. The difficult economic climate in 2024 was also reflected in foreign trade. Exports of goods and services were down 0.8% while imports were up slightly by 0.2% on the previous year, primarily due to increased imports of services. Despite the unfavorable context, the labour market hit a new record high in 2024 with on average 46.1 million persons being employed in 2024 (+0.2% compared to 2023). The general government deficit ratio (2.6%) in a first estimate is assessed to have remained unchanged at previous year's level.
 

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