KBC Sunrise Market Commentary 07/01/2025 via Trader Talent

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Market Commentary

Markets

•          Trump’s (trade) policy ruffled markets yesterday, underscoring the importance of politics under a second term of the former POTUS. The Washington Post citing three people familiar with the matter ran an article saying Trump’s aides are exploring tariff plans that would be applied to every country but only cover critical imports. It’s a major change from the president-elect’s campaign rhetoric, where he promised to slap duties on everything imported into the US. Trump later denied the report but that didn’t stop the risk-on train. It’s a potential sign markets priced in much (if not all) of the bad (tariff) news. European stocks excelled with the EuroStoxx50 rising 2.36%. Tech stocks on Wall Street took the lead (Nasdaq +1.24%). The dollar lost against all major peers except JPY. DXY eased from 108.97 to 108.25 and EUR/USD rebounded towards 1.04. USD/JPY eked out a small gain towards a former (JPY) intervention level of 158. The pair briefly jumped north of that in Asian dealings this morning before paring gains. Export-reliant currencies rose as well. The Aussie dollar tested AUD/USD 0.63 but eventually settled for less at 0.6246. Core bond yields rose but Europe showed a bear flattener compared to the US steepener. European swap yields added between 2.4 and 4.2 bps with front end underperformance following slightly better than expected final PMI’s and a big beat in German CPI figures (0.7% m/m and 2.9% y/y vs 0.5% and 2.6% expected). The latter together with other national readings (eg. Spain) point to upside risks of the European number later today. A 0.4% m/m pace is expected to lift the yearly reading from 2.2% to 2.4%. The acceleration is driven by energy base effects and has been anticipated by the ECB for some time now, meaning it shouldn’t derail easing intentions later this month. Core inflation is expected to match November’s 2.7%. US rates were more or less flat at the front and rose 3.8 bps in the 30-yr sector. The first auction of the year – a $58bn 3-year note sale – tailed >1 bps, putting the spotlights on tonight’s $39bn 10-yr one. The US economic calendar also features the November JOLTS report and the December services ISM. The latter is expected to undo some of the four-point November setback by rising from 52.1 to 53.5. Today’s data is one of the first reality checks to the strong December core bond sell-off. As long as they do not disappoint, we think yield momentum could hold. Resistance in the US 10-yr is located between 4.68 and 4.73%. Yesterday’s FX/dollar price action in our view suggests EUR/USD’s bottom has become a bit better protected, regardless of the ISM outcome.
 

News & Views

•          The British Retail Consortium BRC reported UK retail sales rising 3.2% Y/Y in December of last year, rebounding from a 3.3% decline in the previous month. Same some store sales showed a similar picture (3.1% Y/Y VS -3.4%). The sharp swings in the monthly measure were due to a statistical distortion as 2024 Back Friday sales were reported in the December figure compared to November for 2023. Sales for Q4 as a whole showed only very modest growth of 0.4% in nominal terms, de facto resulting in negative volume growth compared to the same period last year. “Following a challenging year marked by weak consumer confidence and difficult economic conditions, the crucial 'golden quarter' failed to give 2024 the send-off retailers were hoping for,” BRC chief executive Helen Dickinson was quoted. Total 2024 retail sales rose 0.7% while like-for-like sales rose 0.5%. The Q4 sales at least suggest that the new UK budget including higher taxes, didn’t help to support fragile domestic demand. This will remain a element in the BoE assessment when it reassess monetary policy early February.

•          The Czech Republic over 2024 realized a CZK 271.4 bln budget deficit, down CZK 17.1 bln from the previous year, its Finance Ministry reported. The year-on-year improvement in the balance reflects an increase in tax and insurance collections on the revenue side and moderate growth in total expenditures. The Czech Republic's state debt grew to CZK 3 365 bln at the end of 2024 from CZK 3 111 bln the year before. The debt ratio rose to 42.8% of GDP from 40.8% in 2023. The Fin Min yesterday also published the funding and Debt management strategy for 2025. For 2025, the total state financing needs amount to CZK 563.5 bln, i.e. approximately 6.7% of GDP. In the medium-term outlook, the total financing needs will be stabilised at 5.9% and 5.4% of GDP for 2026 and 2027, respectively, which is caused by decreasing state budget deficits and stabilized state debt redemptions in these years.
 

Graphs

GE 10y yield

The ECB delivered a fourth rate cut in December and dropped the reference to keeping policy restrictive. Inflation forecasts barely changed while the growth outlook deteriorated. Sticking with a data-dependent approach, we think the ECB eyes back-to-back 25 bps rate cuts in January and March after which a proper evaluation on neutral interest rates is necessary. Money market positions remains too dovish. The German 10-yr yield rebounded to recent highs in a steepening trend.
 

US 10y yield

The Fed eased policy rates by 25 bps in December but added that “the extent and timing” of further cuts depend on incoming data. Updated rate forecasts above an upwardly revised neutral rate (3%) and higher inflation forecasts with risks firmly skewed to the upside complete the Fed’s hawkish twist. Higher for longer is back and lifted both the front and long end of the curve. The 10-yr yield is on track for a test of the YtD high at 4.73%.
 

Calendar & table

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