KBC Sunrise Market Commentary 18/03/2025 via Trader Talent

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Market Commentary

Markets

•          Yesterday’s final input to the Fed meeting on Wednesday won’t change the status quo decision that’s expected. February core retail sales were decent but in some cases merely rebounded from a weak January while the NY manufacturing index added to a growing stagflationary narrative. US yields whipsawed to finish between -2.8 and +2.8 bps in a flattening move. German Bunds greatly outperformed in what is perhaps some buy the rumour, sell the fact short covering ahead of today’s key vote in the German parliament on the debt package. It’s mere size, a €500bn special infrastructure fund and a de facto blank cheque for defense spending, should serve as solid bottom below yields, making yesterday’s correction potentially a short-lived one. Risk sentiment was positive, spurring equity gains between 0.3-0.9% in Europe and the US. Cyclicals and smaller currencies stood to benefit. The likes of AUD and NZD outperformed, helped higher by new Chinese stimulus initiatives which focus on domestic demand. At the other spectrum there’s JPY and USD. The trade-weighted dollar index finished at a five-month low (103.37). The euro lost against most peers too but nevertheless gained against the US currency. EUR/USD closed above 1.09. EUR/GBP held steady north of 0.84 in technical trading.

•          Asian dealings this morning happen against a constructive background. Regional stocks eke out gains up to 2% in the wake of yesterday’s performance on WS. There is little news to support the moves though. Tariff fears moved a bit to the background for the time being with the next key date some time away still. The US plans to install reciprocal tariffs on April 2. There is heavy debate on how these should look like with proposals ranging from complex methods such as taxing individual countries and products to simplified ones by applying a layered, three-tier system with low, medium and high tariff rates. Today, though, market focus will be on Germany rubberstamping a historical debt deal and the talks between US president Trump and his Russian counterpart Putin. Especially the latter is a wildcard for trading. One of the objectives is probably to have Putin agree to the 30-day ceasefire, signed off earlier by the US and Ukraine. The devil (for Ukraine and Europe altogether) will be in the details but a truce for markets should be positive regardless. Bunds may underperform Treasuries in a daily perspective. EUR/USD is moving towards first resistance of 1.0937 (November correction high). This is only a minor hurdle before moving towards the 1.12-area.
 

News & Views

•          Assistant governor of the Reserve Bank of Australia (RBA) Sarah Hunter confirmed the recent assessment of other board members including governor Michelle Bullock that the RBA is more cautious than the market about the prospect for further rate cuts. The RBA at the February meeting for the first time reduced its policy rate by 25 bps to 4.10% after having kept it unchanged since November 2023. It said then it was the right time to take away some of the restrictiveness. But there is a lot of uncertainty about the RBA’s forecasts, in particular with respect to the policy steps taken in the US, Hunter indicated. With respect to domestic developments in Australia, Hunter said that the pick-up in household consumption in Q4 of last year was not a temporary bounce, but a genuine improvement in the underlying momentum. Markets currently see a chance of about 70% of an additional rate cut at the May meeting. A third rate cut is discounted by autumn. The Aussie dollar recently bottomed against a weakening dollar and recently drew some comfort from China preparing additional measures to support domestic demand. AUD trades near 0.637, compared to sub 0.615 levels in January.

•          Bloomberg referring to people familiar with the deliberations reported that US Trade Representative Jamieson Greer is trying to take control of the process of tariffs announcements on April 2 as he tries to inject order into this sweeping process. According to the Bloomberg article, Greer has reinstated parts of a traditional policy process that were missing from prior tariffs imposed on Canada, Mexico, China and metals by asking for public comments on the reciprocal duties. That gives the trade office a formal way to receive feedback from businesses and other stakeholders. Greer is also said to take those requests into account when setting up the tariff program. Bloomberg also refers to a formula for a single rate for each country based on that nation’s average tariff level and other measures the Trump team considers discriminatory.

Graphs

German 10-y Yield

The ECB is nearing a fine-tuning phase. The March rate cut (to 2.5%) was complemented by labelling the stance as meaningfully less restrictive, leaving some limited room for easing. Seeing the huge spending initiatives, we think the ECB will seize the moment in April (2.25%) before the window of opportunity closes. The upcoming massive defense investment wave pushes the long end of the curve higher too. A test of the 2023 top just above 3% is in the cards.

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. Front-end US yields question recent Fed guidance on a rates status quo. The long end is also vulnerable on how the explosive policy mix could backfire to the US economy.
 

Calendar & table

Contacts