KBC Sunset Market Commentary 15/04/2025 via Trader Talent

Daily Market Overview

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Markets

•          Markets are still licking the wounds of last week’s mayhem. For a second straight session we see a modest risk rebound. With the spirit of Easter in mind, it’s too early to call it a resurrection. We remain very doubtful though when it comes to the sustainability of the comeback moves. German Bunds turned into safe haven assets last week, but are slipping away today without a specific trigger. The very long end of the curve underperforms in a bear steepening move that lifts German yields by 1.5 bp (2-yr) to 5.6 bps (30-yr). The sole European release – German ZEW investor confidence – showed another swing. The expectations component surged to the highest level since February 2022 in March on the back of the fiscal U-turn. In April, the tariff saga pulled the index all the way back to the lowest level since July 2023. The ECB’s Q1 Bank Lending Survey didn’t alter the equation going into Thursday’s policy meeting. It showed lending continuing to stabilize after improving over the last two years. At the margin, it strengthens the case of the policy hawks looking for a policy pause. Despite last week’s aggressive repositioning on European money markets, we stick to our scenario of final 25 bps policy rate (to 2.25%) which bring the central bank’s policy rate (currently meaningfully less restrictive) into neutral territory. It allows the ECB to wait-and-assess how tariffs and German/European spending will impact the medium term growth and inflation outlook. EMU money markets currently contemplate the possibility of a 1.50% ECB rate cycle bottom by year-end. US Treasuries start following Bunds south as we approach the US opening bell. The curve bear steepens as well with yields currently up to 3.5 bps (30-yr) higher. The headline empire manufacturing index improved from -20 to -8.1, but details flash warning signals. The outlook for the next six months crashed to the lowest level since 2001 with manufacturers fearing shrinking orders and shipments. The prices paid subindex rose to its highest level since August 2022 with the prices received index also at the highest level in more than two years. Price expectations point at more inflation pressures (stemming from tariffs). In FX space, EUR/USD for a second straight session drifts to the 1.13 big figure. EUR/GBP dips from 0.86 toward 0.8550. This morning’s near-consensus labour market report failed to inspire. Wages growth stabilized at 5.9% 3M/YoY in the three months to February. The unemployment rate held stable at 4.4% in that period with March payrolls showing a 78k decrease. The March CPI report is on tap tomorrow. We don’t think it will derail the BoE from its current quarterly cutting pace. Stock markets gently endorse US President Trump’s latest feature in the improvised trade strategy: product exemptions. Car parts are rumoured to be next after some electronics. Key European indices win up to 1%. US stock markets open up to 0.4% higher.
 

News & Views

•          Canadian inflation decelerated quicker than expected in March. Headline prices rose by 0.3% m/m to be up 2.3% y/y. This compares to the 1.1% and 2.6% February reading & the 0.7% and 2.7% consensus estimate. Average core gauges unexpectedly showed a minor slowdown from 2.9% y/y to 2.85%. Canada’s statistics agency referred to substantially lower prices for travel tours, airfares and gasoline prices as the main driver. These downward pressures were partially offset by the end of the federal tax break from February 15 on, creating upside base effects for the coming y/y readings (eg. food from restaurants rose 3.2% y/y vs -1.4% in February). The March print fell below the Bank of Canada’s own 2.5% forecast for that month and is within the 2% +/- 1ppt target range. The central bank meets tomorrow and has an updated set of forecasts at its disposal. Canadian money markets raised the odds for another cut after today’s data but continue to favor a pause (45% vs 55%) ever since Trump hit the tariff pause button (for 90 days). The Canadian Loonie loses marginal ground with USD/CAD trading around the 1.39 big figure. Canadian swap yields lose up to 3 bps at the front end of the curve.
•          A day after OPEC lowered its oil growth forecasts, the International Energy Agency slashed its own. The cut was substantially bigger than OPEC’s 125k though and the IEA is overall much less bullish than OPEC. The IEA removed 300k barrels a day from its 2025 forecast to 726k b/d. This would decrease further in 2026 to 692k. OPEC’s projections yesterday stood at 1.3 mln and 1.28 mln respectively. The IEA sticks to a supply surplus in the coming years. It did say that OPEC’s surprise decision early this month to restore output way more than expected in May would have less of an actual effect due to members of the cartel already producing above their quota. Oil prices trade little changed today, holding close to but below the $65/b barrier.
 

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