KBC Sunrise Market Commentary 27/01/2025 via Trader Talent

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Market Commentary

Markets

•          German bunds ended last week underperforming US Treasuries. Euro area PMIs suggested economic improvement is finally underway while price pressures picked up, both on the input and output side. German yields rose between 0.7 (30-yr) to 4.5 bps (2-yr) in bear flattening. US rates overcame early Trump-induced weakness only to take a second hit from an unexpected four-point decline in the services PMI (52.8). Net daily losses amounted to a little over 2 bps across the curve. Dollar weakness accompanied euro strength and lifted EUR/USD towards 1.05 for the first time since mid-December. The trade-weighted dollar (107.44) lost support of the 23.6% retracement on the September-January rally at 107.81. Sterling took the stagflationary sound of the January PMIs surprisingly well. EUR/GBP aborted an umpteenth attempt to settle north of the 0.845 resistance level to close around 0.84 instead. GBP/USD rose sharply and retook 1.24 again in the process. Stocks in the US finished about half a percent lower with sentiment souring dramatically during Asian dealings today. Stock futures, while obviously still very early, point to a steep drop at the open later today (Nasdaq -2.4%). A low-budget Chinese start-up built a model that’s said to be able to compete with heavy-investing peers. The news already broke last Friday – perhaps explaining some of the intraday stock weakness – but gained particularly market/media attention overnight. Chinese stock markets outperform ahead of a week-long close for Lunar New Year. President Trump in other news showed he’s able and willing to make good on tariffs threats. Colombia’s president over the weekend turned away US aircrafts carrying deportees but caved when Trump responded by imposing 25% emergency tariffs and threatened to raise them to 50% in a week. The jury’s out whether a (tech) stock plunge this size is the beginning of a larger correction or considered a buying opportunity. The latter has always been the case in the recent past so far. For now, though, the sour risk sentiment offers the dollar a slight edge over global peers. Core bonds gain with yields losing several basis points currently. Today’s economic calendar is little inspiring ahead of more interesting days later. Central banks meet in the US (Wednesday) and the Euro area (Thursday) as well as in Hungary, Sweden and Canada. Q4 GDP and inflation readings are due in several EMU member states as well as in the US. The earnings season is gaining traction with some of the tech and industrial bellwethers including Meta, Microsoft, Tesla, Apple, Intel & Caterpillar due to report.
 

News & Views

•          Rating agency Moody’s on Friday affirmed the Baa1 rating of Bulgaria with a stable outlook. In its assessment Moody’s says it is balancing three main rating drivers. Firstly, the rating agency expects that de country’s debt burden and deb affordability will remain significantly stronger than rating peers despite a gradual weakening. Moody’s expects the debt-to GDP ratio to gradually move higher from and estimated 24.8% end 2024 to 29% end 2029. The headline budget deficit is expected to stay close to 3.0% in 2025 and 2026. Secondly, Moody’s expects the Bulgarian economy to growth at a solid pace in 2025 and beyond. It sees GDP growth of 2.5% on 2025 and 2.7% in 2026. The credit profile is also supported by the likely adaption of the euro in the foreseeable further. However, thirdly, Moody’s sees the strengths as being balanced by a weakening of institutional effectiveness, evidenced by the slow and halting progress of key reforms and access to funding under Bulgaria’s EU funded RRP.
•          Chinese January PMI’s published this morning slowed more than expected. The manufacturing gauge unexpectedly dropped from 50.1 to 49.1. The non-manufacturing index declined substantially from 52.2 to 50.2. While activity often is reported to slow in the run-up to the Lunar New year Holidays, the decline was bigger than expected. Order growth dropped below the 50 mark both for manufacturing and non-manufacturing. Export dropped sharply (46.4 for both manufacturing and non-manufacturing). Output/selling prices remain well below the 50 mark suggesting ongoing deflationary pressures (47.4 and 48.6 respectively). Other data published this morning showed that profit at industrial firms in 2024 (-3.3%) dropped for the third consecutive year, despite an uptick at the end of last year. The decline mirrors the impact of ongoing deflationary tendencies and persistent weak (domestic) demand despite a long series of stimulus majors put in place. Comments from the Statistical office attributed the uptick toward the end of the year due to the impact of stimulus measures providing subsidies from purchases of some goods. The yuan (USD/CNY 7.266) this morning declines in line with broader USD strength after Friday’s sharp rebound.
 

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