KBC Sunset Market Commentary 05/03/2025 via Trader Talent

Daily Market Overview

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Markets

•          “Whatever it takes.” These words by former ECB president Draghi in July 2012 are widely considered the turnaround in the sovereign debt crisis that had the euro (area) staring into the abyss. Germany’s upcoming chancellor Merz used them again to announce a similar seismic shift on a fiscal level. With a €500bn infrastructure investment fund and essentially unlimited defense spending (exempted from the debt brake) the country addresses two of the most pressing challenges. As a welcome side-effect it could give a cyclical boost to the ailing economy in general. The way Germany’s upcoming government coalition partners struck the agreement – in the dying days of parliament to avoid blocking minorities in the new one – only adds to its already historical status. For it to be approved with the necessary two-thirds majority, the CDU/CSU & SPD still need the support of the Greens, though. In another sign of how the tides have turned, Germany is now urging the EU to ease the fiscal rules quickly. A temporary suspension of the 3% deficit limit rule was one of the options presented by EC president von der Leyen yesterday ahead of tomorrow’s special EU defense summit. Germany’s big and bold move triggers a “Make Europe Great Again” wave of optimism. Stocks in the region add 2.5% (EuroStoxx50) with Germany (+3.3%) outperforming lead by defense, infrastructure and cars. German yields sear up to 25 bps (!). The 30-yr topped 3% again and its 10-yr yield moves beyond the 2024 high. Bund vs swap (10-yr) spread moved to its highest ever (14 bps). The common currency surges for a third day straight, taking out the EUR/USD 1.0533 and 1.0677 resistance levels in the process. Next up is 1.0804.
•          We see opposite dynamics playing out in the US again. The stagflationary genie is out of the bottle, set free by ruthless DOGE department and a raft of tariff announcements, regardless the chance of being watered down in the Canadian and Mexican case – as Commerce Secretary Lutnick suggested. US Treasuries greatly outperformed Bunds with much weaker than expected ADP job growth adding to the spread. Coming in at about half of the 140k expected, the US 2-yr yield fell 8 bps to intraday lows. The long end slips 2.5-4.5 bps. The dollar trades at the backfoot, against the euro in the first place, but against all global peers in a broader perspective. DXY (trade-weighted) breaks below 105.17 support (50% retracement on the Sep-Jan rally) to slip to a four-month low. The next reference from the current 104.7 is 103.94/104.
•          The US services ISM, released when wrapping up this report, came in better than expected. The headline figure in February improved from 52.8 to 53.5 with details printing stronger as well. New orders rose to 52.2 and employment to 53.9. Prices paid ticked higher to 62.6. US yields and the dollar pared some of their previous losses but remain down for the day.
 

News & Views

•           Czech inflation rose by 0.2% M/M, matching consensus. On an annual basis, inflation moderated from 2.8% to 2.7%. Inflation remains slightly above the CNB's staff estimate (2.6%) and will not see significant changes in March. There may be a more visible slowdown due to a negative base effect in April. The CNB should have this number at its May meeting with a new staff forecast. Recall that we expect a another rate cut at that meeting. Core CPI, excluding energy, food, alcohol and tobacco rose by 0.6% M/M (3.2% Y/Y from 3.1%). Details also showed services prices rising by 0.7% M/M and stabilizing at 4.7% Y/Y with goods prices falling by 0.2% M/M to be up 1.4% Y/Y (from 1.7%). The Czech koruna obviously didn’t respond to the data. EUR-strength is pushing EUR/CZK away from the 25 support zone.

•          Swiss inflation accelerated to 0.6% M/M in February to be up 0.3% Y/Y (from 0.4% in January). The monthly increase is due to several factors including rising prices for housing rentals and for air transport. International package holidays also recorded a price increase. In contrast, prices for hotels decreased, as did those for berries and second-hand cars. Details showed overall goods prices rising by 0.2% M/M to be down 1.8% Y/Y while services inflation increased by 0.8% M/M to be 1.7% higher Y/Y. Euro strength is the key driver in EUR/CHF as well with the pair taking out the previous YtD high at 0.9518 today.
 

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