KBC Sunset Market Commentary 20/08/2025 via Trader Talent

Daily Market Overview

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Markets

•          The waiting game continues today in anticipation of PMI business surveys tomorrow and especially Fed Chair Powell’s speech in Jackson Hole on Friday. Core bonds are marginally better bid with daily changes on the US and EMU yield curve limited to -2 bps. Yesterday’s equity market rotation (out of US tech into European (laggards)) seems to continue with European names able to undo a red start to currently trade mixed. US stock markets start the day on the backfoot (up to -0.5% for Nasdaq). EUR/USD is going nowhere at 1.1660. Bridging the gap to next events/eco data, ECB president Lagarde gave some panel remarks at the International Business Council of the World Economic Forum in Geneva. She didn’t really touch on monetary policy though suggested that the implications of the EU-US trade deal will be factored into the ECB’s September macroeconomic projections which will help guide future decisions. Lagarde’s comments centered around the resilience of the global economy despite trade tensions and uncertainty. Frontloading (stockpiling goods ahead of anticipated tariffs) was name of the game in Q1, especially in export-heavy sectors like pharmaceuticals. Domestic factors such as strong private consumption, investment, and a stable labour markets supported EMU growth as well. However, the frontloading effect began reversing in Q2 as tariffs were implemented and is expected to weigh on growth in Q3 as well. The EU-US trade deal imposes average tariffs of 12%-16% on EU goods, below worst-case scenarios. Lagarde did warn for lingering uncertainty about sector-specific tariffs, particularly on pharmaceuticals and semiconductors. She lauded the EU’s strong position as top trading partner for 72 countries around the world and the extensive network of trade agreements, while emphasizing the importance of further diversification beyond the US.

•          UK July inflation rose by 0.1% M/M and 3.8% Y/Y (from 3.6% vs 3.7% expected) with core inflation (3.8% from 3.7%) and services inflation (5% from 4.7%) picking up faster as well. The move strengthens the hawkish rate cut signal by the BoE earlier this month, putting in doubt the likelihood of another rate cut this year. Sterling initially tried to gain on the prospect of longer interest rate support, but ran into a countermove. Failing to really test EUR/GBP support, the pair made a U-turn towards 0.8650. UK Gilts equally showed some kind of sell-the-rumour, buy-the-fact reaction. They outperform Bund and Treasuries with UK yields currently up to 5 bps lower across the curve.
 

News & Views

•          The Swedish Riksbank (RB) left its policy rate unchanged as expected at 2% today. In its monetary policy update the RB admits that inflation has been higher than expected during summer, with CPIF inflation in July at 3% and CPIF excluding energy printing 3.2% Y/Y. The higher outcome was mainly due to volatile factors such as foreign travel and car rentals. Other services and goods overall basically increased in line with the June RB forecast. The RB sees the summer inflation uptick as temporary as other indicators are not pointing to any lasting elevated inflationary pressures. At the same time, growth has been lower than expected. Amongst others, households are still cautious regarding spending in Q2. That said, the RB sees good conditions for a rebound in the Swedish economy later this year, but it will take time before the labour market improves from the currently elevated unemployment rate. Looking forward, the RB concludes that there is still some probability of a further interest rate cut this year, in line with the June forecast. The market reaction to the RB decision was limited. Money markets still see about a 50% chance of a rate cut next month. The krone briefly oscillated at the time of the RB decision but currently trades little changed near EUR/SEK 11.18.

•          Bloomberg reports that Karel Havlick, the Deputy Chairman of the Czech ANO opposition party led by former Prime Minster Andrej Bebis, indicated that the party intends to change the current policy of fiscal austerity if it returns to power after parliamentary elections scheduled to take place on October 3-4. According the Havlicek, the Czech Republic needs to move away from excessive focus on fiscal restraint to kickstart economic growth. He assesses that spending on infrastructure and welfare may lead to a “slightly” bigger deficit, but benefit the country and its finances in the longer term. The ANO party currently leads the SPOLU party of reigning prime minister Petr Fiala in the opinion polls.
 

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