KBC Sunset Market Commentary 04/02/2025 via Trader Talent

KBC Sunset

Tuesday, February 4, 2025

Daily Market Overview

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Markets

• The Trump 2.0 tariff chaos/unpredictability continues. High profile 25% levies announced this weekend on imports of Mexico and Canada obtained a last minute ‘delay ‘overnight. However, uncertainty persists. At the same time, 10% levies imposed on Chinese imports entering the US were applied ‘as planned’, triggering multiple, admittedly still modest, Chinese retaliation measures (10-15% tariffs on energy and some other goods, anti-trust probe versus Google and export controls on rare metals, amongst others). At first sight, the market reaction stays contained and orderly. However, this guarded market reaction at least partially might be a sign of paralysis due to a lack of visibility rather than indicating some comfort. Any directional reaction to whatever action from the US administration potentially might have to be reversed on new, contractionary measures/announcements anytime soon. This lack of visibility not only applies for the investment community, it also determines central banks reaction function. Recent Fed comments at least suggest that the combination of still decent US data combined with inflationary risks from tariffs fits current higher for longer Fed bias. US yields today again add between 1-2 bps across the curve. In a broader perspective, the sideways pattern than dominates trading in US yields since end October/early November remains in place. Since Thursday last week, softer than expected EMU growth data, more than the communication from the ECB policy meeting, caused EMU interest markets to focus on growth risk rather inflation, despite yesterday’s higher than expected January CPI. Today, this move at least takes a breather with German yields rebounding about 3 bps across the curve. Still, money markets err to the side of the ECB potentially reducing the policy rate below 2.0%. The ECB will have to make an in depth revelation in case of substantial US tariffs on EMU goods. However, for now we have to feeling that enough easing is discounted. The perceived ‘controlled’ exchange of tariffs between China and the US for now apparently gives investors some hope of a similar scenario for Europe. We stay a bit cautious, agnostic on this assessment. Still the EuroStoxx50 reversed a modest early decline to currently gain 0.6%. US indices open little changed. Oil extends its decline ($74 p/b).

• On FX markets, the dollar also shows no clear direction pattern. An early risk-off related USD-bid after the Chinese retaliation measures soon evaporated. DXY currently even trades marginally lower in a daily perspective (108.4 area). Similar pattern for EUR/USD (lightly higher at 1.0345). After weathering USD strength recently, the yen today slightly underperforms (USD/JPY 155.3) but holds recent short-term consolidation range (153.75/156.75). After a solid performance of sterling of late (less risk of US tariffs?), EUR/GBP today stabilizes near 0.832, as markets look forward to Thursday’s BoE policy decision, annex ‘guidance’ of a new monetary policy report.

News & Views

• The Organisation for Economic Cooperation and Development (OECD) warned Poland in its 2025 survey a sustained fiscal adjustment is needed to reduce the budget deficit and avoid excess demand. The recommendation builds on the OECD’s expectations for higher social, health and defense spending in coming years combined with running fiscal support measures. It expects a budget deficit in 2025 similar to the 5.8% of GDP in 2024 and called the government’s plan to lower the that ratio by one percentage point over 2026-2028 “ambitious”. It would also dampen economic growth. The OECD anticipates Poland to grow by 3.4% in this year and 3% in 2026, supported by demand from abroad, falling inflation and an eventual gradual easing of interest rates. For now though, the OECD recommends keeping monetary policy sufficiently restrictive to bring inflation back to target. Inflation is seen rising to 5% in 2025, pushed up by the withdrawal of the remaining government energy support measures in 2025H2, before easing to 3.9% in 2026. If it were up to the governor of the Polish central bank (NBP), rates would remain steady through all of 2025. However, opposition from within is rising with some deeming rate cuts possible in the second half of this year. KBC Economics sides with the view of the latter. The Polish zloty should remain strong through 2025 with levels of EUR/PLN 4.25 not that far from the current multiyear highs of around 4.22.