KBC Sunset Market Commentary 14/02/2025 via Trader Talent

KBC Sunset

Friday, February 14, 2025

Daily Market Overview

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Markets

• Weak January US retail sales triggered a rally in US Treasuries going into the long weekend with US markets closed on Monday in celebration of President’s Day. Headline sales fell by 0.9% M/M (vs -0.2% consensus) with sales in the retail control group, used as a proxy for consumption (goods spending) in GDP calculations, falling by 0.8% M/M (vs +0.3% consensus). Wildfires in Los Angeles and severe winter weather in other parts of the country might have depressed brick-and-mortar shopping activity. Nine out of 13 categories posted decreases, like motor vehicles and furniture stores. Spending at the only service-sector category (restaurant & bars) rose by 1% M/M. Upward revisions to December data, respectively from 0.4% M/M to 0.7% and from 0.7% to 0.8% couldn’t compensate for the January miss. The relatively strong move in US Treasuries highlights the different asymmetry in market reaction between Europe and the US. Expectations around Europe are low, triggering asymmetric (larger) moves to positive surprises. Expectations around the US are high, triggering asymmetric (larger) moves to negative surprises. It was already telling that the post-CPI moves earlier this week were so easily erased yesterday. US treasury yields slip 5.2 bps to 7.3 bps across the curve with the belly of the curve outperforming the wings. European swap rates are still a tad higher intraday. The dollar loses out with EUR/USD currently changing hands around 1.05 with a test of the YTD top at 1.0533 likely. The trade-weighted dollar already lost the YTD low at 106.97, currently trading around 106.70. The December low at 105.42 is the next technical reference. European stock markets kept a small positive bias with the EuroStoxx50 testing the all-time high at 5522. US stock markets open flat.

• Next week’s agenda is rather thin with Friday’s global PMI’s the highlight. Labour market and inflation data are scheduled in the UK but unlikely to break the deadlock in EUR/GBP. Central bank meetings Down Under could bring a first policy rate cut this cycle by the RBA and a continuation of the cutting cycle in New Zealand.

News & Views

• Polish inflation jumped far more than expected in January. Headline inflation accelerated to 1% M/M and 5.3% Y/Y (from 0.0% M/M and 4.7% in December vs 5% Y/Y expected). The 5.3% Y/Y pace was the fastest since December 2023. The National Bank of Poland targets inflation at 2.5% with a deviation range of +/- 1.0%. Food and non-alcoholic beverages (which has a weighting of 28% in the index) rose a strong 1.6% M/M. However also other major sub-categories including dwelling related costs and transport at respectively 1.4% M/M and 1.1% M/M contributed to the overall rise in prices. An uptick in headline inflation in January was expected and inflation might slow the coming months. Even so, today’s data will further complicate the debate on a potential start of NBP policy normalization. Especially government Glapinski who already held a hawkish view, might see the data as reinforcing his case that there is no room to discuss policy easing anytime soon. The NBP already holds its policy rate at 5.75% since October 2023. The prospect of persistent interest rate support already for quite some time supports a solid bid for the zloty. EUR/PLN today declines to 4.161, hovering near the strongest levels for the zloty since April 2018.

• In an interview with the Financial Times, French President Macron addressed a with range of (geo)political topics that Europe is currently facing including its security position and a potential ceasefire for the war in Ukraine. To enable European countries to invest more in their defense, the French president again supported the view that more ‘innovative financing solutions’ are needed including more common EU borrowing as was done during the corona pandemic. Macron, in this respect advocated that Europe needs to liberate itself from the deficit caps under the Stability and Growth Pact. He labelled the system as “obsolete” and was quoted that “the financial and monetary framework we live in is outdated”. According to Macron, “Europe is under-leveraged, given its need to invest in emerging technologies such as artificial intelligence, the green transition and security.”