KBC Sunrise Market Commentary 11/02/2025 via Trader Talent

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Market Commentary

Markets

•          Yesterday US president Trump’s ‘announcement policy’ on tariffs continued to dominate market headlines as the president indicated that he was preparing broad-based tariffs of 25% on steel and aluminum. This could only be seen as a next step in the trade war escalation, with potentially ever growing side effects/fall-out both inside and outside the US. Still, the impact on markets remained limited. Whas it because the lack of concrete details yet? Was it market fatigue? At least the issue of a lack of details was (partially) ‘solved’ overnight. Trump ordered the tariffs to take effect next month and to apply to both metals, but the action will also be extended to downstream products. Trump also signaled tariffs on countries that have put levies on US goods. Cars and semiconductors are also on the administration’s radar for potential tariffs. As said, at least yesterday, markets just stood by and watched. US yields maintained their post-payrolls rise, changing 1-2 bps across the curve. The German yield curve steepened slightly (-2.2 bps 2-y; -0.6 bps 30-y). Chair Lagarde in an address before the EU Parliament repeated the message from the January policy meeting that disinflation is on track. Equities also still weren’t bothered by the flaring up of the tariffs rhetoric. US indices gained up to 0.98% (Nasdaq). The Eurostoxx 50 added 0.62%. The dollar gained modestly (Close DXY 108.3, EUR/USD 1.031).
Overnight, an interview of BoE MPC member Catherine Mann in the FT catches the eye. In the past, Mann of was seen as belonging to the hawkish camp, but last week she dissented in favour a 50 bps rate cut as she sees a weaking jobs market and slowing consumer demand dampening businesses pricing power. A 50 bps cut would have been a clear sign according to Mann that easier financial conditions are needed. Sterling this morning weakens slightly further to EUR/GBP 0.8335.

•          The potential fallout of the tariffs’ flood for sure will continue to dominate the headlines today. Still the impact on markets this morning remains very orderly. Asian equities are trading mixed to mostly modestly lower, as do US and European equity futures. The dollar also shows no clear trend (EUR/USD 1.0305, DXY 108.3). The eco data calendar in the US and Europe today still only contains second tier data. US NFIB small business sentiment won’t be a big issue for markets, but might be a pointer for sentiment in the domestic-oriented part of the economy. Fed’s Powell testifies before the Senate. He probably will sticks to the assessment of the January Fed meeting that a solid US economy/labour market and still too elevated inflation are a good reason for the Fed to wait and see upcoming developments. The US Treasury will sell $58 bln of 3-y notes tonight. After Friday’s post-payrolls rebound, the downside in US yields looks well protected. The dollar maybe still enjoys some ‘by default’ bid due to lingering uncertainty on global trade. Even so, for now this is not enough to break any important resistance levels.
 

News & Views

•          The Financial Times reports on an EU paper it has seen in which the EC plans for a radical budget overhaul for the next common budget (starting 2028). They call for a more ambitious budget in size and design to meet spending demands on defense and debt repayments. The commission is also looking to revolutionise the budget’s structure, bringing over 50 rigid spending programmes together into three main funds to provide more flexibility. A simplified budget would agree on a single plan for each country with key reforms and investments, giving national governments a bigger say in deciding projects. The creation of a European competitiveness fund to boost investment in key sectors and common projects and a revamped fund for foreign policy, to align strategic interests are the other pillars.

•          The British Retail Consortium said that retail spending accelerated at the start of 2025 following a disappointing 2024. Total sales were 2.6% Y/Y higher in January, down from +3.2% in December but significantly above last year’s 0.8% average. Details showed both food (+2.8% Y/Y) and non-food sales (+2.5% Y/Y) rising. Demand was solid even as the comparison base was rather low and as bouts of story weather put a temporary dampened on demand. BRC chief executive Dickinson warns though that retailers faced £7bn of extra costs later this year because of rising minimum wages, a new packaging levy and especially higher employer social security contributions: “many businesses will be left with little choice but to increase prices, and cut investment in jobs and stores”.
 

Graphs

German 10-y Yield

The ECB lowered rates again in January but is nearing a fine-tuning phase where back-to-back reductions are over. A rate cut in March (to 2.5%) may be complemented by removing the label “restrictive” on its policy stance as the debate on the neutral interest rate kicks off. The escalating US trade war adds a layer of uncertainty and volatility in the mix with risk aversion/growth worries currently the dominant

US 10y yield

After three consecutive cuts, the Fed installed a pause in January which we expect to last through June. The Fed wants to see “serial readings” suggesting inflation is progressing towards target. A pause simultaneously offers time to a clearer view on president Trump’s policies. The prolonged Fed rates status quo provides a solid bottom beneath front-end US yields. The long end is more vulnerable on how the explosive policy mix could backfire to the US economy as well.
 

Calendar & table

Contacts