KBC Sunrise Market Commentary 03/03/2025 via Trader Talent

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Market Commentary

Markets

•          Event risk looms large this week as narratives unfold at similar levels. We therefore continue to err on the side of caution, favoring traditional haven assets. First, there’s the US growth story. Markets turned more sensitive to risks of a US growth slowdown or even recession as US President Trump’s policy mix (going from the DOGE blitzkrieg to the tariff threats) risks backfiring. Confidence surveys turned very pessimistic with the Atlanta Fed’s latest GDPNow forecast pointing at an annualized 1.5% GDP decline in Q1 after Friday’s widening trade deficit data suggested a significant drag from net exports with personal spending data reduced projections for consumer spending. This week we’ll see US ISM surveys, ADP employment change and payrolls. Last week’s uptick in weekly claims might be a prelude for weakness in public sector hiring. Risks to this week’s eco data remain asymmetric with negative outcomes likely to trigger more pronounced moves than positive data. A second topic to watch are negotiations around a truce in Ukraine. Friday’s summit between Trump and Ukrainian President Zelensky in Washington ended in a shouting competition instead of signing the mineral resources deal which could have been a step-up to further negotiations. Several EU leaders called an emergency summit yesterday in response. Countries like the UK and France are gathering a European “coalition of the willing” to secure any ceasefire. They floated the idea of a one-month truce covering air, sea and (energy) infrastructure sites to establish confidence on both sides. Next, they hope to revamp the mineral-deal in order to avoid the US from pulling security guarantees. The broader EU Council meets on Thursday to discuss a €20bn military package for Ukraine and ways to rapidly boost defense spending even if it means giving up fiscal rules. Third, there’s tomorrow US deadline for hitting neighboring countries with tariffs. Trump proposed a 25% rate, but commerce secretary Lutnick this weekend said that the final level still needs to be decided upon. The countries did “a lot” on border security, but not enough to address worries on “fentanyl deaths in America”. A delay or reduced level are still possible. The 10%pts mark-up on Chinese tariffs seems to be a done deal. After tomorrow’s deadline there are more cutoffs lining up like March 12 (steel & aluminum) and April 2 (reciprocal tariffs & more sectoral tariffs eg cars, semiconductor chips and pharmaceutical drugs). Fourth, there’s the European trace with EMU February inflation data today and the ECB meeting on Thursday. Both headline and core inflation are expected to moderate, respectively from 2.5% Y/Y to 2.3% Y/Y and from 2.7% Y/Y to 2.5% Y/Y. Today’s numbers won’t move the market needle. A 25 bps rate cut on later this week to 2.5% is discounted, with the ECB probably no longer labeling its monetary policy restrictive. Several ECB members recently floated the idea of a pause in the cutting cycle in April, our preferred scenario, with money markets currently attaching a 33% probability to that idea. Finally, Chinese leaders meet on Wednesday for the National People’s Congress where president Xi Jinping is expected to unveil a new stimulus plan together with official growth and deficit goals.
 

News & Views

•          Rating agency S&P put a negative outlook on the French AA- credit rating. That’s in line with Fitch while Moody’s holds a similar rating, but with a stable outlook. The negative outlook reflects rising government debt amid weak political consensus for tackling France's large underlying budget deficits, against a backdrop of more uncertain economic growth prospects. A downgrade is possible if the French government fails to cut deficits further over the next two years or if growth falls below projections. The rating agency lowered this year’s growth outlook from 1% to 0.8%, putting even more pressure on public finances. By 2028, S&P France's average cost of debt to be roughly equal to nominal GDP growth, meaning that in order to reduce debt to GDP, the government will need to operate a primary budget surplus, which it has not achieved since 2001. S&P projects the debt ration to rise to 119% of GDP in 2028 from 111% in 2024.

•          US President Trump suggested on his social media platform Truth Social that the would move forward on a US crypto strategic reserve. He named bitcoin and ethereum as the ‘heart of the reserve” but also referred to solana, XRP and cardano. After his inauguration, Trump signed an executive order to support digital assets and blockchain technology. Legislative proposals are already being drafted with in one republican-backed Senate bill looking to direct the US Treasury to buy 1mn bitcoin. The US President is expected to host and speak at the first ever White House Crypto Summit on Friday.
 

Graphs

German 10-y Yield

The ECB is nearing a fine-tuning phase where back-to-back reductions are over. A rate cut in March (to 2.5%) may be complemented by removing the label “restrictive” on its policy stance as the debate on the neutral interest rate kicks off. For the long end of the curve, the escalating US trade war through risk aversion/growth worries conflict with upward yield pressures stemming from a massive defense investment wave that’s on the way.

US 10y yield

After three consecutive cuts, the Fed installed a pause in January which we expect to last at least through June. The Fed wants to see “serial readings” suggesting inflation is progressing towards target. A pause simultaneously offers time to a clearer view on president Trump’s policies. The prolonged Fed rates status quo provides a solid bottom beneath front-end US yields. The long end is more vulnerable on how the explosive policy mix could backfire to the US economy as well.

 

Calendar & table

Contacts