KBC Sunset Market Commentary 13/05/2025 via Trader Talent

KBC Sunset

Tuesday, May 13, 2025

Daily Market Overview

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Markets

• The sharp market moves (higher yields, stronger dollar, bullish stocks) on the 90-day US-Sino Chinese trade truce made way for a waiting game today in the run-up to April US CPI numbers. The recent chain of events changed markets’ sensitivity to the inflation data. Ahead of last week’s FOMC meeting and this weekend’s Geneva talks, markets were heavily skewed toward anticipative Fed rate cuts. Such context is/was fertile for downside CPI surprises as they take even more weight off the argument in the other side of the balance. Going into the release, especially upward surprises had market moving potential as they could extend the ongoing (hawkish) repositioning in US money markets. A Fed rate cut is only fully discounted by September. This setting helps explain the modest reaction to slightly softer inflation numbers. From a market stability perspective, it was probably the best possible outcome. Both headline and core CPI rose by 0.2% M/M in April, ducking the 0.3% consensus estimate. On an annual level, headline CPI slowed from 2.4% to 2.3% while core CPI stabilized at 2.8%. Both are the lowest since the spring 2021 inflation breakout, but still above the Fed’s 2% inflation target. Core services less housing rose by 0.2% M/M and 2.7% Y/Y. Other details showed food prices dipping by 0.1% M/M (+2.8% Y/Y; special mention to falling egg prices -12.7% M/M & +49.3% Y/Y), energy prices rising by 0.7% M/M (higher electricity outstripping lower oil; -3.7% Y/Y). Shelter prices were responsible for a big share of the increase, rising by 0.3% M/M (+3.6% Y/Y). Lower used cars and trucks prices (-0.5% M/M; +1.5% Y/Y) and airline fares (-2.8% M/M & -7.9% Y/Y) had an offsetting impact.

• US Treasury yields take back up to 3.5 bps (5-yr) from yesterday’s sharp gains. EUR/USD ticked higher from the 1.11-area to 1.1130 at the time writing. US stock markets turned corrective losses in futures trading into small gains thanks to the goldilocks inflation number. German Bunds underperform US Treasuries with German yields up to 2 bps higher at the very long end of the curve. German May ZEW investor sentiment showed a sharp improvement in the forward looking expectations component (25.1 from -14), compensating part of the losses observed in April. ZEW President Wambach said that “With a new government in place, some progress in the tariff disputes and a stabilising inflation rate, optimism has increased”. This morning’s in line with consensus UK labour market data and hawkish comments by BoE Pill left no traces on UK markets with EUR/GBP holding steady just above the 0.84-mark.

News & Views

• Reuters citing several ECB policymakers reported that the central bank will likely keep quantitative easing and other stimulus measures as part of its toolkit when inflation and interest rates are at rock bottom. The likes of Belgian central bank governor Wunsch had previously said the ECB should discuss dropping this particular QE reference in the updated official strategy, due to be presented by the summer. Others (Knot, Schnabel) argued that QE should be used in short bursts rather than costly lengthy ones. Large-scale bond buying created huge losses for national central banks once inflation and rates shot up in the wake of the post-pandemic recovery. At least part of it could have been avoided if the ECB wasn’t trapped in its forward guidance to keep rates ultra-low and even negative. Reuters’ sources said that during the May 6-7 retreat there was general agreement that this tool should be used in a more constrained manner. The strategy review will most likely reaffirm the ECB’s commitment to a “symmetric” 2% inflation target.
• With today’s release of final April Czech CPI came the central bank’s personal assessment. The final headline number matched the preliminary -0.1% m/m and 1.8% y/y. This slowest pace since March 2018 was possibly related to Easter discounts, which this year took place in April compared to March in 2024. Core inflation rose only slightly to 2.6%. The increase in prices of core goods stopped and offset growth in market services prices (4.5%), leading to an overall more or less stable core CPI y/y print compared to March. The CNB said, however, that with other items on the rise as well, such as holidays and air travel, there’s evidence that services inflation has not fully stabilized and therefore continues to call for a cautious approach to monetary policy. The latter comment should be seen against the backdrop of last week’s (final?) rate cut to 3.5%, which is around the neutral rate. The CNB expects inflation to stay between 2% and 3% in the months ahead.