KBC Sunset Market Commentary 06/05/2025 via Trader Talent

KBC Sunset

Tuesday, May 6, 2025

Daily Market Overview

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Markets

• After the publication of mostly stronger (activity)/higher (price) than expected data in Europe and the US last week and yesterday, markets relapsed into wait-and-see modus. Waiting, in the first place for multiple central bank decisions later this week, including a Fed and a BoE meeting tomorrow and on Thursday. Enjoying current relative calm in headlines on US trade initiatives, markets are also keen to get some insight in the process/outcome of first potential new trade deals. What might be a ‘final’ level of the tariffs? Will it be closer to the 10% bottom or closer to the upper bound of reciprocal tariffs? How stable/sustainable is the outcome expected to be? This waiting game today was disturbed by upheaval in the German Parliament as Friedrich Merz completely unexpectedly failed to get parliamentary approval to become Chancellor. A new vote is scheduled this afternoon. Even if Merz then gets the parliamentary backing needed, the failed first attempt is raising questions on the ability of the new government to convincingly execute its (reflationary) agenda. Even so, except for some intraday swings, the impact on Bunds was limited. German yields currently are even rising between 0.5 bps (2-y) and +4.0 bps (30-y). Counting down to tomorrow’s Fed meeting, the US yield curve in technical trading again bull steepens with the 2-y yield easing 3.5 bps (2-y) and the 30-y adding 2.0 bps. The failure of Friedrich Merz to secure a majority in a first reaction triggered losses of up to 2.0% of the Dax, but a big part of is already undone (Dax -0.6%, Eurostoxx 50 -0.5%). US equities after recent rebound also reverse back into correction mode (S&P open -0.75%). Oil for now sees no (further) losses from this weekend’s OPEC+ decision to further raise output levels. Brent even rebounds back north of the $60 p/b barrier (currently $ 61.6).
• Still mainly technical trading in the major USD cross rates. The German headlines only had a limited and temporary impact on EUR/USD. USD rather than euro weakness prevails. DXY eased further to 99.4. EUR/USD easily holds well north of 1.13 (1.134). The yen both outperforms the dollar (USD/JPY 142.7 from 143.7) and the euro (EUR/JPY 161.6 from 162.6). Sterling also shows remarkable strength ahead of Thursday ‘s expected BoE rate cut (EUR/GBP 0.847 from 0.85.1). The Swiss franc eases slightly (EUR//CHF 0.9345) after SNB governor Schlegel commented on recent franc strength. SNB remains prepared to intervene in FX markets if necessary to guarantee price stability.

News & Views

• Czech inflation unexpectedly declined by 0.1% M/M in April. Consensus anticipated a steady pace of +0.1% M/M in line with March. The annual figure, which was set for a steep setback because of base effects (sharp rise in food prices in April last year), fell below the 2% CNB inflation target as a result (2.7% to 1.8% vs 2.1% expected). In its February monetary policy report, the CNB penciled in a 2% Y/Y pace for April. Details showed negative monthly contributions from energy (-0.9% M/M & -6.3% Y/Y), food, alcohol &tobacco (-0.6% M/M & 3.3% Y/Y) and goods (-0.3% M/M & 0.2% Y/Y). Core CPI (excl. energy, food, alcohol & tobacco) rose by 0.3% M/M (2.9% Y/Y) with services inflation increasing by 0.2% M/M (4.7% Y/Y). The latter remain a concern for the CNB who meets tomorrow to decide on its policy rate. Recently, CNB members pushed back against markets discounting aggressive rate cuts related to tariff/growth uncertainty given that upside inflation risks still prevail. Tomorrow ‘s decision will be a close call. We err on the side of a hawkish 25 bps rate cut to 3.50%. The Czech 2-y swap rate fell back from 3.27% to 3.22% today after rising from the 3.1% area the past fortnight on the back of the CNB comments. The Czech koruna is marginally weaker at EUR/CZK 24.97 (from 24.92).

• Bloomberg reports that the EU is planning tariffs on about €100bn of US goods if trade talks fail to yield a satisfactory result. They come on top on the €21bn of levies already in place (but not yet implemented to match the 90-day reciprocal tariff pause) as a counter to Trump’s duties on steel and aluminum exports. Member states will be consulted over the next month to come up with a detailed list. Separately, the EC will probably this week try to kickstart negotiations with the US by sharing a paper that handles trade matters. Proposals include lowering trade an non-tariff barriers and boosting investments in the US. The EU said earlier today that the US administration’s ongoing trade investigations will boost the amount of affected goods facing tariffs to €549bn.