KBC Sunset Market Commentary 05/05/2025 via Trader Talent

KBC Sunset

Monday, May 5, 2025

Daily Market Overview

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Markets

• One of the biggest (and sole, really) movers in today’s uninspired session was oil. Brent crashed >4% during Asian dealings before recovering intraday. OPEC+ decided on Saturday to restore another 411k barrels of output in June. That’s the same amount they decided in April to do for May, which was also a huge surprise back then. It shows that OPEC (and Saudi Arabia) is eager to regain market share while punishing members with above-quota production. The balance of risks for oil prices remains tilted to the downside given tepid global demand. Dollar weakness is the name of the game on currency markets. EUR/USD trades higher around 1.1363, be it within the established narrow 1.13-1.15 range. USD/JPY drops from 145 to 143.6 and the trade-weighted dollar index turns back below 100 in another sign of the dollar lacking momentum for a comeback worthy the name. Among the best performers is the Australian dollar (second place after JPY in G10). AUD has high hopes from the Labour Party election victory. A solid majority paves the way for clearcut policies, including what is dubbed a fiscal “spendathon”. Sterling is going nowhere just north of EUR/GBP 0.85 amid UK markets closed for May Day and going into Thursday’s Bank of England meeting. A rate cut is expected with growth and inflation forecasts probably downgraded. The key question, however, is how much scope for cuts the BoE sees going forward given the stagflationary vibes running through the UK. Money markets currently price in around 100 bps of cuts for the remainder of the year (incl. Thursday’s meeting). The Fed also convenes this week on Wednesday but we expect no change in the tone Powell held during a speech two weeks ago: Too high inflation and upside inflation risks have priority over a still-robust labour market. A long rates pause (beyond the summer) is in the cards. The upcoming Fed meeting and lack of eco data – until the US services ISM releases that is – help explain the calm in core/US bond markets. US yields trade little changed apart from some (natural?) long end underperformance (30-yr +3.6 bps). We see a similar curve shift in Germany (+30-yr + 1.6 bps).
• The April US services ISM came out to the better side of expectations with the headline index improving from 50.8 to 51.6 (50.2 expected). Details showed new orders recovering to 52.3 after a 1.8 point drop in March. Employment still shrinks but only marginally (49.0 from 46.2). Prices paid gained traction again though, with the subseries rising to the highest level since early 2023 (65.1). US yields eke out a few additional bps and the USD pares earlier losses after the release in a first reaction.

News & Views

• Swiss CPI consumer prices stagnated in April, both compared to March 2025 and compared to April 2024, according to data published by the Swiss Statistical office (FSO) today. This compares to expectations for a 0.2% M/M rise. Core inflation also printed at a softer than expected 0.1% M/M and 0.6% Y/Y. Domestic prices declined 0.1% M/M to slow to 0.8% Y/Y. Imported goods rose 0.3% M/M but were 2.5% below last year’s level. Goods prices rose 0.2% in a monthly perspective, but declined 2.0% Y/Y. Services prices fell 0.1% M/M to be up 1.4% Y/Y. The data were also lower than the forecast of the Swiss National Bank (SNB) at the time of its March policy meeting when it saw inflation at 0.4% on average in Q1 and at 0.3% in Q2. The average expected for this year was already set at a low 0.4%. The combination of low inflation, being reinforced by a strong Swiss franc caused markets to fully a discount a new rate cut at the June 19 meeting from 0.25% back to zero. The Swiss franc eased marginally/temporarily after the CPI release (EUR/CHF 0.934). Even so, in case of further Swiss franc strength, the SNB faces the difficult choice of reconsidering FX interventions and/or returning to negative rates.

• Turkish inflation in April rose 3.0% M/M and 37.86% Y/Y, compared to 2.46% and 38.10% in March. Core inflation excluding energy, food and beverages, tobacco and gold rose 3.34% M/M and 37.12% Y/Y. The outcome was marginally lower than expected. After starting gradual easing last year, the Central Bank of the Republic of Turkey at the April 17 meeting again raised its one week repo rate to 46.0% from 42.5%. In March the CBRT already took emergency tightening measures to preserve financial stability and cope with renewed inflationary risks from a weaker currency due to domestic political turmoil at that time. The lira dropped to new all-time lows (against the dollar and the euro) after the imprisonment of opposition member Ekrem Imamoglu. The weak currency probably will force the CBRT to keep a tight monetary conditions from some time to come. At USD/TRY 38.586, the lira is holding near all-time low levels against the dollar except for the volatile moves on March 19.