KBC Sunrise Market Commentary 13/03/2025 via Trader Talent

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Market Commentary

Markets

•          Markets yesterday saw the glass half full rather than half empty but for now its too early to draw any conclusion on a tentative bottoming out-process in (US) yields and/or equity markets. Regarding the multiple, often divergent storylines that markets have to cope with, the US trying to convince Russia to accept its proposal on a ceasefire for the war in Ukraine was a supportive factor for EMU equity markets (Eurostoxx 50 +0.97%). US markets also tentatively look for a bottom (Nasdaq +1.22%). A softer than expected US CPI (both February headline and core easing to 0.2% M/M vs 0.3% expected) also gave some comfort as investors are pondering the impact of tariffs further out. The EU retaliating against the US 25% tariff on steel an aluminum indicated that trade war is still a developing, highly unpredictable storyline, but next steps probably are only to be expected early April. The milder risk sentiment helped a further bottoming process on US interest rate markets. US yields rebounded further between 4.35 bps (2-y) and 3.25 bps (10-y) across the curve. European yields after last week’s sharp repositioning are in a (ST) consolidation phase. The German yield curve even slightly flattened with the 2-y yield adding 2.6 bps while the long end eased slightly (30-y -2.1 bps). We don’t draw any conclusions yet. At the ECB and its Watchers conference in Frankfurt, ECB chair Lagarde indicated that inflation might become more volatile and persistent in an era of several types of shocks. The ECB is examining the impact of the shocks. Lagarde didn’t given any concrete guidance on what this means for day-to-day monetary policy. Even so, the fiscal support that Germany/Europe is putting in place only suggest that there is a good reason for the ECB to move to a wait-and-see approach once policy is no longer restrictive. Markets remain divided on a next ECB rate cut in April (40-60 chance in favour of a pauze).
On FX markets, the pressure on the dollar also eased, at least temporarily. DXY ‘rebounded’ from 103.4 to 103.6. EUR/USD corrected back below 1.09 (close 1.089). USD/JPY also gained from 147.8 to 148.25, but closed well of the intraday top levels. Sterling outperformed both against the dollar and even more against the euro. EUR/GBP 0.8450/75is doing its job as a short-term resistance.

•          Despite yesterday’s rebound on WS, Asian equity markets show a hesitant picture this morning with several regional indices showing losses of 1.0%, Japan slightly outperforming. The DXY index is going nowhere (103.6). EUR/USD is correcting marginally further (1.0875). The yen outperforms (USD/JPY 147.8). BOJ governor Ueda in a response to questions in parliament, indicated that he remains confident that consumer spending will be further supported as wage rises are expected to continue. Later today, US PPI producer prices and weekly jobless claims probably will only be of intraday significance for trading. The EMU calendar is thin today. Still, a session with little high profile news might give some indication on underlying sentiment. In this respect, we look out how the recent EMU steepening trade evolves after yesterday’s pauze. On FX markets, we stay cautious on the dollar as US risk sentiment remains fragile. The risk of a US government shutdown at the end of the week in this respect probably doesn’t to help revive the dollar’s status as a solid reference/safe haven.
 

News & Views

•          The National Bank of Poland kept its policy rate yesterday unchanged at 5.75%. The expected inflation range for this year was slightly downwardly revised, from 4.2%-6.6% in November to 4.1%-5.7% while the one for next year faced an upward revision, from 1.4%-4.1% to 2%-4.8%. The NBP sees inflation between 1.1% and 3.9% in 2027. An additional inflationary source which featured a first time in the statement is a further economic recovery with a marked increase in domestic demand. References to the impact of already introduced increases in energy prices, rises in excise duties and administered services prices as well as the further unfreezing of energy prices in the second half of 2025 remain. This also shows up in upward revision to GDP projections: 2.9%-4.6% this year, 1.9%-4% next year and 1.1%-3.5% in 2027. NBP president Glapinski is expected to stick to his hawkish rhetoric at today’s press conference. The zloty obviously wasn’t impressed by the ongoing rate status quo, sticking near EUR/PLN 4.20.

•          The Bank of France cut its growth forecast from this year from 0.9% in December to 0.7%. It also downgraded next year’s prognosis from 1.3% to 1.2%. BdF chief economist warns to uncertainty on the international level linked to what is happening with US tariffs. The size of the negative impact will depend on targeting and duration. Upside risks come from additional defense spending. New inflation forecasts stand at 1.3% this year and 1.6% next, down from 1.6% and 1.7%.
 

Graphs

German 10-y Yield

The ECB is nearing a fine-tuning phase where back-to-back reductions are over. The March rate cut (to 2.5%) was complemented by labelling the policy stance as meaningfully less restrictive, opening the door for a potential pause in April, our preferred scenario. For the long end of the curve, upward yield pressure stems from a massive defense investment wave that’s on the way. A test of the 2023 top just above 3% is in the cards.

US 10y yield

After three consecutive cuts, the Fed installed a pause in January which we expect to last at least 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. Front-end US yields question recent Fed guidance on a rates status quo. The long end is also vulnerable on how the explosive policy mix could backfire to the US economy.
 

Calendar & table

Contacts