KBC Sunrise Market Commentary 19/03/2025 via Trader Talent

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Market Commentary

Markets

•          Core bonds gained slightly yesterday with US Treasuries marginally outperforming Bunds. German yields eased 1.3 bps at the front while remaining flat at the long end of the curve. The outgoing parliament greenlighted a historical debt plan that paves the way for hundreds of billions of investments in defense and infrastructure. Its approval triggered a minor profit-taking (short-covering) move in Bunds without technical implications. US rates fell between 0.4 and 1.8 bps in volatile trading and ahead of the Fed meeting today with a decent 20-yr bond auction adding to momentum. EUR/USD gained ground to 1.0945, despite a poor US risk sentiment. The common currency brushed off kneejerk weakness coming from Bloomberg reporting that Russian president wants all arms supplied to Ukraine to be halted as part of a truce. Upping the ante like this dented hopes for a quick win. Eventually though, the US and Russia during the highly anticipated talks agreed to a 30-day ceasefire strictly confined to energy infrastructure. That’s well short of the unconditional and general truce the US and Ukraine proposed. The US Middle East envoy Steve Witkoff after the meeting said talks with Russia will continue on Sunday in Saudi Arabia. Sterling traded stoic after hearing about the £5bn welfare spending cuts per year by 2030. The weakening economic outlook (and rising bond yields) force UK Chancellor Reeves into additional spending squeezes at next week’s Spring Statement.
•          The Japanese yen is among the weaker performers this morning against an overall stronger USD. It follows the Bank of Japan meeting earlier (cfr. infra). The central bank in the US takes center stage later today. The March meeting is accompanied with an updated dot plot and new inflation and growth forecasts. Data recently have added to a growing market narrative of stagflation, mostly in soft indicators (e.g. consumer confidence, NY manufacturing index). But hard economic data wasn’t so bad (services ISM, solid payrolls growth, IP, housing). That should prevent the Fed (and therefore the new projections) from getting carried away by the recent bearish (stock) sentiment, especially with uncertainty on the tariff narrative still this big. It’s not until April 2, when Trump’s reciprocal tariffs are to be announced, it’s worth making an analysis. In theory there’s little to push the Fed off the January track (extended pause) but the devil for US rates and the dollar could be in the details. Any touch of dovishness by Powell during the presser is likely to be picked up by markets. The downside in (front-end) US yields is nevertheless limited with the March correction low serving as solid support. At that time, markets were pricing around three cuts this year, deviating from the current (and probably new) dot plot. EUR/USD is catching a breather now, but we stick to the view of upside potential (1.12 in first instance).
 

News & Views

•          The Bank of Japan as expected left its policy rate unchanged at 0.5%. The domestic economy is continuing a gradual improving trend. Private consumption has been on a moderate increasing trend despite the impact of price rises and other factors, as is business fixed investment. Exports and industrial production have been more or less flat. CPI inflation (ex fresh food) has been in the range of 3.0-3.5% recently, amid rising services prices (wage increases) and a rollback of government energy measures. The BOJ expects the economy to keep growing above potential, with overseas economies continuing to grow moderately and as a virtuous cycle from income to spending gradually intensifies. Underlying CPI inflation is likely to be at a level that is generally consistent with target. The BOJ earmarks the international developments regarding trade as an important risk to the outlook. Domestic developments suggest room to gradually normalize policy, but the BOJ creates space to adapt the timing to cope with international developments. The next BOJ policy decision is May 1. The 2-y bond yield this morning adds 2 bps (0.84%). The 10-y adds 1.2 bps (1.52%). The yen continues its recent correction with USD/JPY nearing the 150 barrier.
•          Fitch in a comment yesterday said that Hungary’s recently announced fiscal measures highlight the authorities’ balancing of policy priorities ahead of parliamentary elections in spring 2026. The rating agency thinks authorities will calibrate economic stimulus measures to avoid increasing financial market volatility, especially given the greater inflationary pressures at the start of this year. The government recently announced targeted fiscal measures of HUF 900bln over 2025/28 to support families. Fitch raised its deficit forecast to 4.5% of GDP in 2025 and 4% in 2026, from 4.2% and 3.7%, respectively. The revision reflects weaker macroeconomic conditions, higher inflation and government bond yields, and additional tax exemptions. Still Fitch doesn’t expect aggressive monetary easing or fiscal expansion on a scale similar to that ahead of 2022’s parliament election.
 

Graphs

German 10-y yield

The ECB is nearing a fine-tuning phase. The March rate cut (to 2.5%) was complemented by labelling the stance as meaningfully less restrictive, leaving some limited room for easing. Seeing the huge spending initiatives, we think the ECB will seize the moment in April (2.25%) before the window of opportunity closes. The upcoming massive defense investment wave pushes the long end of the curve higher too. 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