KBC Sunrise Market Commentary 21/01/2025 via Trader Talent

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Market Commentary

Markets

•          The first reaction after the start the Trump presidency, confirmed that markets have to cope with more elevated volatility as the new US administration is putting its new policy in place. Markets initially reacted positive as Trump stopped short of immediately imposing tariffs China (and apparently also Europe). The dollar declined but hours later part of this move was undone as 25% tariffs on Canadian and Mexican imports still looks part of the new approach. However, threat on the US’s close neighbors apparently is more related to the domestic agenda of border protection, rather than a consequence the administration’s trade policy. This suggests that in a first instance this domestic agenda in of border security, migration, energy and deregulation might prevail. With respect to trade, we assume some ‘carrot-and-stick approach’. The 75 days for TikTok to find a US partner might provide time for the two countries recalibrate their strategy. A similar period of investigation on the trade relations with Europe might be on the cards. Europe buying more US energy might by a first ‘bargaining chip’ as more profound questions remain under investigation. The process will face plenty of communication hicks-ups. In this context, we assume an era of similar/persistent volatility, as the one we experienced the previous 24 hours. The dollar and interest rate markets in such a scenario might look for (broadened?) sideways trading ranges as this process develops.

•          Looking at the concrete market reaction, US yields currently decline between 4.5 (2-y) and 7.5 bps (5 & 10-y). The Fed being in its blackout period gives additional time to prepare the communication at January 29 meeting. The 2-y US yield currently dropped to test intermediate support in the 4.20% area. In case of a further correction, the 4.08% December low still should provide solid. First indications on the USD are a bit mixed. The USD declined on the absence of initial aggressive import tariffs, but this was partially reversed on the Canada/Mexico headlines. The new administration studying currency manipulation over time suggests a potential cap on USD gains, but it might be too early for this narrative to already play a major role ST. The lingering threat to tariffs short-term probably puts a floor for the dollar. Even so, we take notice of a sharp rebound of the yuan. For EUR/USD, the picture is similar to the US 2-y yield. The dollar tested first support near EUR/USD 1.0428. Even in case of some further correction we expect the EUR/USD 1.0630 early December top to be tough to break.

 

News & Views

•          New EU car registrations rose by 5.1% Y/Y in December. The European Automobile Manufacturers Association (ACEA) said that Spain was responsible for the increase (+28.8% Y/Y). Among the largest markets, France posted modest growth (+1.5% Y/Y) and with the likes of Germany and Italy reporting a decline. Looking at the 2024 calendar year, a similar pictures arises. New car registrations rose slightly (+0.8% to 10.6mn) with Spain showing resistance (+7.1%) and Italy (-0.5%), Germany (-1%) and France (-3.2%) posting drops. Petrol cars retained their lead with 33.3% of new cars, followed by 30.9% of hybrid electrics (HEV), 13.6% of battery electrics (BEV) and 11.9% of diesel cars. Zooming in on Belgium, new car registrations fell 8.9% Y/Y in December (to 23.4k) and by 6% over the 2024 calendar year (to 448k). New petrol cars were responsible for 41.7% of registrations with BEV (28.5%) and plug-in hybrid electrics (15%) coming in second and third. HEV (9.2%) and diesel (4.9%) cars make up most of the remainder.

•          The Bank of Canada’s Q4 2024 Business Outlook Survey showed overall business sentiment remaining subdued, but firms beginning to anticipate improvements in sales activity (driven by recent interest rate reductions and the anticipation of further cuts ahead). Intensions to increase investments, or to resume them after postponement, have become widespread. Hiring plans remain modest with most businesses having some spare capacity. Meanwhile, businesses expect growth in costs to continue to ease and growth in selling prices to stabilize. Firms nevertheless fear higher input costs due to trade tensions. A second BoC survey of consumer expectations showed an improvement again because of the BoC cutting cycle. For the first time since 2021, consumers said they expect their spending to increase faster than they expect prices to rise. Even as high prices, housing costs and uncertainty continue to weigh on spending . Consumers’ inflation expectations have largely returned to historical norms.
 

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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