KBC Sunset Market Commentary 19/02/2025 via Trader Talent

KBC Sunset

Wednesday, February 19, 2025

Daily Market Overview

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Markets

• ECB executive board member Schnabel is the first to suggest that the direction of travel (of monetary policy) is not so clear anymore. She thinks that Frankfurt nears the point where it should start the discussion on pausing or halting rate cuts. Schnabel pointed out that an April rate cut is no longer fully priced in. Domestic inflation is still high and risks to the inflation outlook are somewhat skewed to the upside. She can’t say with confidence that monetary policy is still restrictive and suggests dropping that label from the policy statement at the March meeting. ECB president Lagarde hinted in the same direction at the January press conference. Schnabel downplayed the ECB study earlier this month on the level of neutral interest rates: “the ECB staff analysis that was published recently had one main message: we know that we know very little.” The theoretical concept of R* is therefore ill-suited to determine the appropriate policy stance. She also wanted to straighten out that the focus on the narrow 1.75%-2.25% outcome from the study was for models which estimated were available for Q4 2024. If you look at the R* estimates for the third quarter, you see that the range actually goes up all the way to 3%. Schnabel’s key message going forward is that maintaining price stability over the medium term is likely to require higher real rates in the future than before the pandemic. When talking about future ECB policy, she advocates one of the outcomes of the BoE’s Bernanke review: to make greater use of scenario analysis. Another key point is that the ECB should be more tolerate to both moderate downward and upward deviations from the 2% target and only act when there is a threat of de-anchoring. In between the lines, she suggests that the ECB might have overdone it in the past. Asset purchases for example have proven very effective in stabilizing markets, but haven been less beneficial and costlier than thought as a monetary policy instrument.
• European bonds extend their underperformance today on the Schnabel comments. They add to the change of heart at ECB speak which based on language models examining policy statements, speeches,… started turning less dovish since the December policy meeting. EU swap rates add over 4 bps across the curve with German Bund yields climbing by up to 6 bps (5-yr). US Treasury yields on the contrary are broadly unchanged. The euro fails to profit from the yield differential with EUR/USD slipping from 1.0460 towards 1.0430 as European risk sentiment soured. Key European benchmarks drop over 1% after the EuroStoxx50 set a record high only last week. Tariff threats and disappointing earnings from a big US chemical player cause underperformance of industrials.

News & Views

• The ECB today released EMU 2024 current account data. The euro zone current account surplus rose substantially last year to €419bn from €241bn. The rise in the nominal amount raised the surplus ratio in terms of GDP to 2.8% from 1.6% in 2023. The increase was mainly driven by a bigger surplus in the goods balance, rising from €256bn (1.6% of GDP) to €390bn (2.6% of GDP). The services balance showed a more modest rise from €123bn to €162bn (1.1% of GDP). The negative balance of the secondary income balance (redistribution of income via transfers for international aid and multilateral organizations, amongst others) declined slightly from -€170bn to -€165bn. The primary income balance was unchanged at €32bn. Regarding the financial account, EMU residents made net direct investments of €74bn. Non-residents divested net €102bn. Net purchases of non-euro area equity increased to €145bn, up from €89bn in 2023. Net purchases of non-euro area debt securities increased to €519bn, up from €380 bn. Non-residents’ net purchases of euro area equity increased to €350bn from €158bn in 2023. Over the same period, non-residents made net purchases of EMU debt securities amounting to €461bn, following net purchases of €398bn in 2023.
• A survey of the Origo Group commissioned by the Swedish Riksbank mapping expectations among money market players, showed Swedish inflation expectations tentatively rising in February compared to January with the CPIF inflation at 1, 2 and 5 years rising to 1.9%, 2% and 2.2% respectively, all 0.1 ppt higher. Expectations for growth are also put higher at 2.2% for this year and 2.3% next year. Respondents anticipate the Riksbank policy rate to be higher in a medium term perspective (12 month 2.1% from 2%, 24 months 2.3% from 2% and 60 months 2.5% from 2.4%). The upward revision come as the Riksbank indicated that it could be at the end of its easing cycle.