KBC Sunrise Market Commentary 09/01/2025 via Trader Talent

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Market Commentary

Markets

•          Markets took aim at UK assets. Both gilts and sterling suffered steep losses. Yields soared another 4.5-11.3 bps. The 10-yr yield (+11.3 bps to 4.79%) surpassed the previous post-pandemic highs to hit the highest levels since ’08. The 30-yr yield already smashed Tuesday’s 27-yr high by adding another 10.9 bps to 5.35%. Such underperformance at the long end of the curve reveals fiscal and inflation risks are the driving force. This has been the case ever since UK Chancellor Reeves’ presented her extremely loose fiscal plans in October. Because of the material yield increase, the UK risks breaching its self-imposed fiscal rules when the OBR (UK’s budget watchdog) releases new forecasts March 26. If that were to be the case, Bloomberg reported citing people familiar that Reeves would resort to spending cuts rather than impose new taxes. The ones proposed in the October budget have already caused a corporate backlash and dented sentiment. Higher risk premia explain why the pound fails to profit from otherwise juicy rates. EUR/GBP shot up from 0.828 towards 0.835 and is extending gains in Asian trading this morning. Rates in Europe climbed higher as well. Germany added between 0.5 and 6.6 bps. Its 10-yr yield hit a 7-month high north of 2.5%. US rates were little changed on the day with moves varying between -0.8 bps and +1.8 bps. Lower than expected weekly jobless claims contrasted with the ADP job report undershooting consensus. The closely watched 30-yr auction went smooth. The minutes of the hawkish Fed’s December policy meeting carried a similar tone. They triggered little intraday volatility. The dollar appreciated against most majors. EUR/USD closed around 1.032, down from 1.034 but off intraday lows. USD/JPY isn’t planning to leave the 158 big figure anytime soon, despite the verbal warnings over the last couple of days from Japanese officials. USD/CNY (7.331) continues to grind higher with the 2023 multi-year high (7.35) ever coming closer. GBP/USD (cable) underperformed and is currently testing April 2024 support at 1.23. The general trend of a strong(er) USD and higher core bond yields is obvious. It could take a breather today though given the empty economic calendar, proximity of important resistance levels and the partial absence of US investors. US stock markets are closed and its bond markets leave early due to a national day of mourning for ex-president Carter.
 

News & Views

•          China December inflation data published this morning showed that deflationary tendencies remain in place despite multiple government efforts to revive domestic demand. CPI inflation was unchanged in November (0.0% m/m), lowering the y/y measure from 0.2% to 0.1%. Goods prices declined 0.2% Y/Y, services inflation rose slightly (0.4% from 0.5%). Core inflation (ex food and energy) also rose slightly from 0.3% Y/Y to 0.4%. Factory gate prices (PPI) remain negative for the 27th consecutive month at -2.3 Y/Y (from -2.5% in November). The ‘rise’ in core inflation and the slowdown in producer price deflation might be a first indication that support measures have some stabilization effect, but there is still a long way to go to restart a protracted reflation spiral. At 1.61%, China’s 10-yr government bond yields stabilizes near record low levels. Ongoing low inflation justifies a weak currency, but the PBOC continues to take action for this process to develop in an orderly fashion. At USD/CNY 7.331, the onshore yuan trades near its 2023 low against the dollar. The PBOC this morning announced the launch of a 60 bln yuan sale of 6-month bills in Hong Kong to increase demand for the offshore currency.

•          Permanent placements and vacancies fell at accelerated rates in December, the KPMG and REC UK report on jobs revealed. Firms were reported to be further considering the employment cost implications of the late October government Budget, and as such placements fell to the greatest degree since August 2023. Despite a drop in permanent placements, the report signals an acceleration in the rate of starting salary inflation as firms remained willing to raise pay for high quality staff. Even so, vacancies in December also declined at the fastest pace in well over 4 years. At the same time, the availability of staff increased at the steepest pace since June. The combination of a slowdown in labour demand on the one hand and at the same time ongoing wage rises is another illustration of the policy paradox for the Bank of England as it ponders the pace of further easing going into 2025.
 

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 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 7-month 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

Contacts