KBC Sunset Market Commentary 06/03/2025 via Trader Talent

KBC Sunset

Thursday, March 6, 2025

Daily Market Overview

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Markets

• The ECB cut its policy rate as expected by 25 bps with the deposit rate hitting 2.5%. The decision wasn’t unanimous, but there was no opposition neither. Hawkish Austrian ECB governor Holzmann did abstain. In its monetary policy statement, the central bank for the first time emphasizes that monetary policy is becoming meaningfully less restrictive. Updated growth and inflation forecasts are little changed compared with December. The central bank expects inflation to average 2.3% this year, 1.9% in 2026 and 2% in 2027 compared to a 2.1%-1.9%-2.1% path three months ago. The prognosis for core CPI stands at 2.2%-2%-1.9%. The December growth path of 1.1%-1.4%-1.3% was slightly downgraded into 0.9%-1.2%-1.3%. High uncertainty is holding back investments and exports, but services remain resilient. Risks remain tilted to the downside. Throughout the official statement, it was remarkable that the ECB/President Lagarde only mentioned the German U-turn on fiscal spending and European efforts being negotiated on defense spending as an upside inflation risk, not mentioning its potential positive impact on growth. Lagarde stressed the data-dependent and meeting-by-meeting approach from the central bank going forward, not pre-committing to any specific rate path. She acknowledges though the impact of the previous (150 bps) rate cuts and admitted for a first time that if data suggest it, the ECB will pause (in April). EMU money market remain split on the outcome of the next meeting, with our preferred scenario being a skip in the cutting cycle. EUR/USD attempted to sustainably take out 1.0804 resistance around the time of the ECB meeting, but the move lacked strength following earlier gains this week. The USD-side of the equation remains weak though with speeches by Fed Waller (tonight) and Powell (tomorrow) together with US payrolls as wildcards to come. Lack on any specific guidance implied that moves on interest rate markets were still subject to yesterday German fiscal whatever-it-takes pledge by chancellor-to-be Merz. The German yield curve bear steepened again yields rising by 2.7 bps (2-yr) to 10 bps. The German 10-yr yield currently trades at 2.9%, closing in on the 2023 top at 3.03%. Changes on the US yield curve vary between -3 bps (2-yr) and +1 bps (30-yr). US eco data showed a bigger-than-hoped setback in weekly jobless claims (221k from 242k vs 233k expected) and the feared widening of the trade deficit (to a record -$131.4bn) as US companies imported goods before tariffs came into effect. European stock markets still opened positive, but in general slightly return part of yesterday’s impressive gains. US stock markets open up to 2% lower for Nasdaq.

News & Views

• Swedish inflation accelerated more than expected. The monthly pace picked up from 0.4% m/m in January to 0.9% in February. The yearly (CPIF) figure print rose from 2.2% to 2.9%. Inflation excluding energy rose by 0.9% m/m to hit 3% on a yearly basis. All of the readings were higher than expectations, including those from the central bank. They help settle the debate whether or not the Riksbank has reached the end of a 175 bps easing cycle. Governor Thedeen has been pretty vocal about the current rate being at an appropriate level of 2.25%. This is also what the latest Riksbank projections show. The Swedish krone extended a recent rally in the wake of the publication before paring the gains later on. In a broader perspective, EUR/SEK (10.96) is trading at the lowest (SEK strongest) level since December 2022. Due to Sweden’s large military capacity, the Swedish crown emerged as the market’s darling since Europe and especially Germany’s turned towards massive defense spending.

• The Turkish central bank (CBRT) as expected cut the policy rate from 45% to 42.5% today. Annual headline inflation eased from 42.1% to 39% in February. The underlying gauge of inflation resumed its decline in February after picking up in January. Based on domestic demand measures, the central bank is confident this disinflationary trend will continue. The CBRT is paying close attention to still elevated inflation expectations though, saying they continue to pose risks to the disinflation process. As a result, “the tight monetary stance will be maintained until price stability is achieved via a sustained decline in inflation.” The CBRT refrained from official guidance and sticks to a meeting-by-meeting approach instead. The Turkish lira trades little changed in a daily perspective, both against EUR (39.41) and USD (36.42).