KBC Sunset Market Commentary 17/04/2025 via Trader Talent

Daily Market Overview

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Markets

•          The ECB cut the main policy rate by 25 bps to 2.25% and indicated the current stance is no longer weighing down on the economy. The decision was unanimous with no one tabling a bigger cut but no one pushing for a skip either (something which Lagarde said some governors would have done so until a few weeks ago). The statement removed the March reference that “monetary policy was meaningfully less restrictive” (so still slightly restrictive) and no longer saw monetary headwinds coming from the past interest rate hikes. The ECB said the disinflation process is well on track and inflation has continued to develop as expected. Most measures of underlying inflation suggest that inflation will settle at around the 2% target. The economy has been building up some resilience but rising trade tensions have deteriorated an “exceptionally uncertain” outlook and are likely to reduce confidence among households and firms. Downside risks to economic growth have increased, Lagarde said, a headline that grabbed market attention and triggered a kneejerk extension to an intraday drop in European/German yields. Risks (plural, indeed) for inflation are more double sided. She mentioned the possible rerouting of exports to the EU from countries with overcapacity and the strong euro vs fragmentation of supply chains and the impact of massive infrastructure and defence spending. Regarding future steps, Lagarde would no longer confirm that the direction of travel was clear though. She stuck with the mantra of going meeting by meeting and be data dependent. But neither would the ECB chair formally label the policy stance as a neutral one. The concept of a neutral rate is only useful in a world free of shocks. Instead, the destination of the ECB and the policy rate will be determined by readiness (for potential shocks) and agility without rushing to a particular stance.

•          ECB’s Lagarde mentioned the long list of risks multiple times up until the point she wouldn’t want to repeat them all over once again. She also flagged the immense uncertainty and unpredictability that muddy the view whether and which of these risks will eventually materialize. This in our opinion is a strong argument for the central bank to adopt a more cautious and waiting stance, especially after already having delivered a cumulative 175 bps of monetary easing. Euro area money markets beg to differ in a copycat move with those in the US post-Powell yesterday. They basically added to their easing bets with another one for June priced in for 85% with a terminal rate now even below 1.5%. Such a growth supporting rate in our view is unnecessary and in any case very premature to assume. Euro area yields drop up to 7 bps with the short end of the curve outperforming. The 2-y swap yield risks losing the lower bound of the downward trend channel. The euro is holding steady though, not adding to the minor early morning losses. EUR/USD trades around 1.136. Other markets including European equities trade with losses of around 0.6% in technically insignificant trading. Wall Street is going mixed into the long weekend (Good Friday tomorrow).
 

News & Views

•           The Turkish central bank (CBRT) unexpectedly raised its key one-week repo rate from 42.5% to 46% today. However, since the Turkish market rout triggered by the jailing of president Erdogan’s most important and popular rival, Ekrem Imamoglu, the CBRT in an emergency meeting suspended the repo window as a funding source. It since then instead offered funding through the overnight lending window, which back then was hiked to 46% and once again today to 49%. Therefore, only if the one-week repo facility remains shut, today’s decision implies a 300 bps monetary tightening move. The move nevertheless signals a readiness by the central bank to act if necessary and vows to keep the tight monetary stance until price stability is achieved via a sustained decline in inflation to the 5% target in the medium term. The Turkish lira strengthens against the dollar and slightly against the euro. In a broader perspective, though, both USD/TRY (38.07) and EUR/TRY (43.48) trade at historically high (TRY weak) levels.
 

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