KBC Sunset Market Commentary 20/05/2025 via Trader Talent

KBC Sunset

Tuesday, May 20, 2025

Daily Market Overview

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Markets

• All eyes were on Japan. A flopped 20-yr bond auction pushed long-term Japanese bond yields through the roof and immediately raised the stakes for next week’s 40-yr sale. Japan’s fiscal position is a very weak one with its prime minister yesterday calling it even worse than Greece’s. Its huge debt pile is already around 250% of GDP. A lot of debt is owned domestically, of which >45% by the Bank of Japan. However, the Bank of Japan has been slowing down bond purchases as part of its policy normalization and it appears that other domestic bond holders (>40% of outstanding JGBs) do not jump in to fill the gap. Debt and fiscal unsustainability concerns lie at the heart of the matter and the auction was merely a trigger. The Japanese 30-yr hit an intraday record high (3.15%) while the 40-yr tenor closed at one (3.59%). Spillovers to core bond markets were limited at first but shortly after the European opening bell yields headed north nonetheless. That didn’t stop at the US open. Net daily changes currently vary between +1.7 bps (2-yr) to +8.7 bps (30-yr) in the US and up to 6.7 bps (30-yr) in Germany. UK gilt yields staged a sharp intraday U-turns, erasing a 6 bps opening drop to trade 4.5-5.4 bps higher, not in a bear steepener though, but in a flattener. Bank of England chief economist Pill was remarkably vocal in pushing back against rates being cut too quickly. Pill wanted to keep the policy rate steady at this month’s meeting, worrying that rates are coming down too fast in the face of still elevated pay increase and robust services inflation. His fears stem from the fact that the UK may have entered a new regime where price shocks no longer fade “quickly and painlessly” as behaviour of firms and households fundamentally changed. The chief economist said rates have plateaued too low in 2023 (5.25%) and therefore argues for cautious cuts only. In practice that means an even slower pace than the current quarterly one.

• Pill’s comments barely support sterling, though. EUR/GBP continues to trade in an extremely tight trading range just north of 0.84. Other currencies trade little changed. EUR/USD holdq steady around 1.123, the trade-weighted dollar index kept the 100 lever alive. The Japanese yen does not capitalize on the huge yield jump, most likely because it’s risk premia driving the move higher. It even erased an early Asian gain that rooted from finance minister Kato seeking bilateral FX talks with US Treasury Secretary Bessent. USD/JPY is currently changing hands around 144.88. The Aussie dollar underperforms global peers today in the wake of the RBA’s 25 bps rate cut. While the move was expected, the softish policy statement and press conference was not.

News & Views

• Belgian consumer confidence bounced back in May, from the lowest level since December 2022 (-14) to the second best reading since October of last year (-7). More positive expectations for the general economic situation (-30 from -44) and diminishing concerns about unemployment (13 from 21) made a particularly strong contribution to the boost in confidence. The improvement in confidence is also apparent at the personal level. Households report improved expectations for their own financial situation (-3 from -8). Their saving intentions are also up slightly (19 from 17). Belgian consumer confidence is now again at its long-term average (1990-2024). On Thursday, the National Bank of Belgium releases its May update for business confidence. A rebound can be expected as well as on the back of easing global trade tensions which reduce recession risks.

• Headline Canadian inflation fell by 0.1% M/M with the annual figure falling back below the Bank of Canada’s 2% inflation target (1.7% from 2.3% vs 1.6% consensus and vs 1.5% expected by the BoC). The slowdown in April was driven by lower energy prices, which fell 12.7% and comes mainly from the removal of a consumer carbon tax. Excluding food and energy, core inflation accelerated by 0.5% M/M or from 2.4% to 2.6% in Y/Y-terms. The Bank of Canada’s preferred gauge (trimmed mean) rose by 0.4% M/M and from 2.9% Y/Y to 3.1% Y/Y, the fastest pace since March of last year. The acceleration in core inflation was more fierce than expected and pushes BoC rate cut bets for the June 4 policy meeting below 50%. The preferred outcome is now a policy rate status quo in line with the April decision. Today’s inflation report was the penultimate major input for the central bank with Q1 GDP numbers still due on May 30. The Canadian Loonie trades slightly stronger after the CPI report around USD/CAD 1.3920.