KBC Sunset Market Commentary 11/03/2025 via Trader Talent

KBC Sunset

Tuesday, March 11, 2025

Daily Market Overview

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Markets

• Bunds continued their underperformance vs US Treasuries as well as against swap. German rates add another 4 bps in a bear steepening move that’s still the result of last week’s dramatic fiscal policy U-turn. Its importance simply cannot be overstated and it’s unambiguously good news for Europe, European rates and the common currency. The German fiscal envelope (€500bn special fund, defense expenditures exempted from the debt brake and easier spending rules on a local & state level) is subject to approval by the Greens, which are needed to deliver the two-third majority. While they don’t agree to the proposal as it is in its current state, their opposition is not at all unsurmountable. If anything, we think it’ll only lead to an even bigger cheque that includes some green sweeteners. Its co-leader today in any case said she’s hopeful of a deal this week. The German 10-yr yield is on track for its highest close since 2023Q4. US yields trade 2 bps lower in whipsawed trading. They continue to look vulnerable at the downside. The euro remains in the driver’s seat. EUR/USD rallies to north of 1.09, the strongest level since November 2024. Barring some intermediate resistance levels around 1.0961 and 1.10, the road towards 1.1214 is wide open. The US dollar in any case won’t stop the common currency. The greenback remains in the defensive with local/US cyclical worries riding high. These get compounded by increasing talk of the US losing its exceptionalism status that catapulted the dollar towards the world’s reserve currency (and kept bond yields lower than they otherwise would be). The trade-weighted DXY index tanks to new YtD lows around 103.37 and is testing the November 2024 correction low in the process. EUR/USD’s 1.1214 mirror image in DXY is 100.157. The Japanese yen is taking a breather after a nice run over the last couple of days. USD/JPY tested the 148 area. US eco data was limited to JOLTS job openings, where a small January beat was offset by a similar-sized December downward revision. Small business optimism (NFIB) fell for a second month from it’s 5-yr high to 100.7 on concerns about inflation and uncertainty on tariffs and trade wards that’s leaving business owners in a wait-and-see mode. President Trump’s fresh announcement is a case in point. He’s doubling the steel and aluminum tariffs on Canadian steel to 50%, effective tomorrow, in a response to Canada’s levy on electricity exports to the US. The CAD loses ground and with Trump’s announcement dies a shy, unconvincing attempt by US equities (-0.9% to -1.4%) to find a bottom after yesterday’s knockout punch. European equity losses mount to 1.7%.

News & Views

• Inflation in Hungary in February printed at 0.8% M/M and 5.6% Y/Y (1.5% M/M, 5.5% Y/Y in January), substantially outpacing expectations again. Food prices (1.2% M/M, 7.1%Y/Y) were a factor beyond the overall rise. However, the national bank of Hungary (MNB) analyses that most product groups were contributing to the rise in core and headline inflation. Core inflation rose 0.4% M/M and 6.2% Y/Y. Monthly changes were above historical averages. Inflation of sticky-price products and core inflation excluding processed foods stood at 5.8% Y/Y. Prices of tradeable goods increased 0.3% M/M and 2.4% Y/Y. Prices of market services also showed a strong upward dynamic (0.9% M/M, 9.9% Y/Y). The MNB adds that households’ inflation expectations remain high. Corporate expectations also confirm an upward trend since October. Mihaly Varga, who became MNB governor last week, already indicated that there was no room to ease the policy rate (currently 6.5%) in the near future. The 2-y swap yield jumped 7 bps (6.44%). Prime Minister Orban said the government will cap profit margins of retailers on 30 basic food products to 10% from mid-March to end May. The forint weakened to EUR/HUF 400 after testing the 398 area yesterday.

• In its quarterly economic report on the Spanish economy, the Bank of Spain today upwardly revised its expectations for both 2025 economic growth and inflation. GDP growth expectations were raised from 2.5% in December to 2.7%. Aside from a positive overhang from last year, the Bank of Spain sees the outlook for household income now being better than in December, which could have a positive effect on consumption. Inflation is revised by 0.4 pp compared to 2.5%. While substantial, this upward revision is mainly due to expected higher energy costs. The bank sees risks slightly skewed to the upside. It keeps a close eye on domestic inflationary pressures.