KBC Sunrise Market Commentary 17/01/2025 via Trader Talent

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Market Commentary

Markets

•          All eyes were on December US retail sales yesterday, but a CNBC interview with Fed governor Waller turned out to be the key market-moving event. The hawk-turned-dove copied tactics of BoE Taylor on Wednesday, by pointing out that the central bank could have more room to lower rates during 2025 than stretched valuations (especially after Friday’s payrolls) suggest(ed). He didn’t go as far as Taylor by putting 125-150 bps on the table, but put rate cuts in the first half of the year on the table if the Fed continued to get inflation data like Wednesday. A January pause is a done deal, but Waller wouldn’t entirely rule out action in March. Following the Fed’s hawkish tilt in December and in anticipation of growth (and inflation) boosting fiscal policies by US president Trump, we still think that March will be out of the equation. Especially given ongoing strength in the US labour market and the economy. That brings us back to yesterday’s retail sales which increased by 0.4% M/M in December on a headline level (after an upwardly revised +0.8% M/M in November) with the control group (used as a proxy for consumption in GDP calculations) even growing by 0.7% M/M. A huge surge in the January Philly Fed business outlook to the 2nd best level since January 1984 is also worth mentioning. Surging new orders, shipments, employment and average workweek all bode well for a further recovery in the manufacturing sector. The US Treasury market ignored the data, but extended the post-CPI repositioning rally. US yields eventually lost 2.4 bps to 5.1 bps with the belly of the curve outperforming the wings. EU swap rates corrected a more modest 1 to 2 bps across the curve. The US dollar switched small intraday gains for losses. EUR/USD closed at 1.0301 up from 1.0289. US stock markets failed to profit with key indices losing 0.2% (Dow and S&P 500) to 0.9% (Nasdaq). European stock indices outperformed gaining up to 2.15% for the (luxury-heavy) French CAC 40. The EuroStoxx 50 gained 1.5% and is now 0.3% away from taking out the 2024 top to the best level since 2000. Today’s eco calendar in uneventful. Markets are counting down to US president-elect Trump’s return to office. A flurry of (executive) orders and policy directives could create quite some nervousness and volatility next week suggesting to err on the side of caution going into the long weekend. US markets are closed on Monday for Martin Luther King Day.
 

News & Views

•          China hit its growth target of “around 5%” in 2024 on the mark. GDP expanded 5% last year, exceeding the 4.9% consensus estimate slightly. The quarterly pace picked up from an upwardly revised 1.3% to 1.6% in Q4. Growth was supported by a surge in exports late last year amid companies frontloading potential tariff increases on Chinese goods by the incoming US administration. The accompanying monthly data set also showed retail sales picking up from 3% to 3.7% y/y in December. The resulting 3.8% y/y increase for the whole Q4 was the quickest in 2024. Industrial production accelerated from 5.4% to 6.2% y/y in the final month of the year. China’s property market remains under pressure with home prices again dropping on a monthly basis. But the drop in residential property sales continues to decelerate in December (-17.6% YtD YoY). The data suggest China’s barrage of stimulus over the last couple of months is gradually filtering through. The statistics bureau does warn though that they “must be aware that the adverse effects brought by external environment are increasing, the domestic demands are insufficient, some enterprises have difficulties in production and operation, and the economy is still facing difficulties and challenges.” Both Chinese stocks and the yuan catch a tiny bid this morning. USD/CNY eases to 7.328.

•          Bulgaria’s parliament yesterday approved the next government coalition, consisting of the Gerb party of former PM Borisov, the pro-Russian BSP and a populist-labeled group called There is Such a People. It’s another minority administration that got a majority backing in parliament with the support of an ethnic Turkish party. Bulgaria has gone through a range of caretaker governments and minority governments over the last couple of years. Seven straight elections failed to produce a ruling majority. The new centre-right PM Zhelyazkov of Gerb sought to ease concerns of taking BSP on board with a spokesperson by stressing that “The Euro-Atlantic agenda is among the main priorities.” The goal after bringing back (political) stability is to join the Eurozone as well as strengthening its fiscal position. Bulgaria fulfilled the last criteria on inflation for euro membership. After the expected positive assessment by the ECB, a date could be set, probably the start of next year.
 

Graphs

GE 10y yield

The ECB delivered a fourth rate cut in December and dropped the reference to keeping policy restrictive. Inflation forecasts barely changed while the growth outlook deteriorated. Sticking with a data-dependent approach, we think the ECB eyes 25 bps rate cuts in January and March after which a proper evaluation on neutral interest rates is necessary. Money market positions remains too dovish. The German 10-yr yield rebounded to 7-month highs in a steepening trend.

US 10y yield

The Fed eased policy rates by 25 bps in December but added that “the extent and timing” of further cuts depend on incoming data. Updated rate forecasts including an upwardly revised neutral rate (3%) and higher inflation forecasts with risks firmly skewed to the upside complete the Fed’s hawkish twist. Higher for longer is back and lifted both the front and long end of the curve. The 10-yr yield closed above the 2024 high (4.73%) on stellar December payrolls.
 

Calendar & table

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