KBC Sunrise Market Commentary 24/01/2025 via Trader Talent

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Market Commentary

Markets

•          Markets initially still looked for direction as they tried to take stock of the communication avalanche during the first days of the new Trump administration in the US. A tentative steepening move was already developing early in US dealings and this pattern was rubberstamped as US president Trump in a remote address spoke to the Davos World Economic Forum. He elaborated on wide range of topics of his political agenda. Tariffs remain on the table for Canada and Mexico, China and Europe, but he still didn’t give any additional specifications yet. In an interview with Fox later, he even indicated that he rather would prefer not to have to impose taxes on China. However, markets probably mainly reacted to his call/push for OPEC to lower the cost of oil. Trump sees this as an important factor to mitigate inflation and a strong argument for the Fed (and other central bankers) to cut rates. The comments further helped to cap short-term yields. At the end of the day, US yields varied between -0.9 bps (2-y) and +4.25 bps for the long end of the curve (30-y). Even so, Trump’s analysis at least didn’t help to mitigate longer term inflation expectations, being the main driver from the rise at the long and of the US yield curve. German yields rose between 0.9 bps (2-y) and 2.4 bps (30-y). After some hesitation, US equities resumed their uptrend with the S&P 500 (+0.53%) closing at an all-time record. A constructive risk sentiment and a steepening US yield curve weighed on the US dollar. DXY closed marginally lower at 108.05 regained the 1.04 barrier (1.0415). Brent oil extended its decline (close $78.3 p/b).

•          This morning, the BOJ as expected raised its policy rate by 25 bps to 0.50% (cf. infra). A stronger yen this morning causes Japanese equities to underperform the region (Nikkei -0.1%). At the same time, Chinse markets are drawing some additional comfort from Trump taking a ‘guarded’ approach on raising tariffs. The CSI 300 gains 0.8%. CNY ‘jumps’ against the dollar with USD/CNY declining to currently trade near 7.245 (from 7.282). First indications this morning suggest the steepening of the US yield curve to continue (2-y -3.5 bps) keeping the dollar on the backfoot. DXY drops further testing the 107.6 support area. USD/JPY in a similar pattern is near the YTD lows (154.8 area). EUR/USD is testing (minor) resistance in the 1.0460 area. Later today, markets’ still will mainly be driven by investors adapting positions to the ‘guidance’ from the new Trump administration. However, in Europe we also keep an eye at the first estimate of the January PMI’s. The consensus expects them to remain at levels pointed to limited to no growth (composite PMI 49.7). Maybe there is room for a small upward surprise. We also keep a close look at the price/cost indicators as the ECB is coming closer to a neutral policy stance and as a re-evaluation of its easing trajectory might be on the table at the March policy meeting.

 

News & Views

•             The Bank of Japan raised its policy rate by 25 bps to “around 0.50%”, the highest level since 2007-2008. Japan’s economic activity and prices have been developing generally in line the BoJ’s outlook and the likelihood of realizing the outlook has been rising. In such scenario, the BoJ will accordingly continue to raise the policy rate and adjust the degree of monetary accommodation. Especially as the BoJ is less concerned about the future course of overseas economies, particularly the US and developments in financial and capital markets. They dropped that reference, replacing it by “stability on the whole”. The central bank left its GDP forecasts for fiscal year 2024-2026 broadly unchanged at 0.5%-1.1%-1% while rather significantly raising the inflation path: from 2.5%-1.9%-1.9% for headline CPI to 2.7%-2.4%-2% and from 2%-2%-2.1% for core CPI (ex fresh food and energy) to 2.2%-2.1%-2.1%. Core CPI is thus expected to remain above the 2%-target over the policy horizon. The BoJ points out that firms expressed the view that they will continue to raise wages steadily, following the solid wage increases last year. There’s also a reference to higher import prices stemming from the Japanese yen’s depreciation. BoJ governor Ueda will start his press conference as we finish this report. Japanese bond yields add up to 2.5 bps this morning with the belly of the curve underperforming the wings. JPY is slightly stronger, testing the YTD lows around 155. Today’s rate hike was flagged in advance with markets looking for clues in Ueda’s comments on how quick and how much more tightening to expect later this year. Currently, one more 25 bps rate hike is discounted by year-end.

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 cut rates by 25 bps in December but added that “the extent and timing” of further cuts depend on data. Updated forecasts including an upwardly revised neutral rate (3%) and higher inflation forecasts with risks skewed to the upside completed the Fed’s hawkish twist. Higher for longer is back. The 10-yr yield tested the 2024 high (4.73%) on stellar December payrolls, but took a pause assessing the policy of the new US government.

 

Calendar & table

Contacts