KBC Sunrise Market Commentary 20/05/2025 via Trader Talent

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Market Commentary

Markets

•          The 30-yr bond yield at some point yesterday surged more than 13 bps, including last Friday’s late-session move, to 5.03%. Trump’s Big Beautiful but costly Bill getting shaped in the House only proved Moody’s point for its AAA-rating downgrade and added fuel to the fire. But the Treasury sell-off lured dip buyers into the arena and by the end of yesterday’s trading day we saw a full recovery of all losses – to the exact basis point. The symbolical 5% resistance area lives to fight another day but it’s clear fiscal sustainability as a market theme is again front-and-center. It’s another argument next to the developing trade story for the Fed not to rush into cuts. Both Bostic (Atlanta) and Williams (NY) yesterday stressed it could take well into or even after the summer before things have cleared up somewhat to allow for informed, data-based decisions. As US bonds found some footing, so did UK gilts. The UK is trapped in a similar tricky budget situation and yields, particularly long-term ones, shot up to 10 bps higher as well before paring gains to just 2.5 bps tops (30-yr). German yields followed the US intraday pattern, outperforming them along the way. Net daily changes eventually varied between flat (30-yr) and -1.2 bps (2-yr). The dust quickly settled on equity markets too. Wall Street gapped lower but recovered throughout the session. Both bonds and stocks fully erased their intraday losses but the dollar did not. EUR/USD rose to a 1.1288 high and closed at 1.124 compared to 1.116 at the open. The trade-weighted DXY came close to the 100 barrier. USD/JPY returned sub 145 with JPY extending gains this morning after Japan’s finance minister Kato is arranging a meeting with USTS Bessent to discuss FX. Japanese yields trade sharply higher. A poor 20-year Japanese bond sale this morning flings long-term rates up in the sky and ups the ante for next week’s 40-yr auction. The 30-year yield adds more than 13 (!) bps and smashes through the 3% to 3.11%. Since Japan began issuing 30-year bonds in 1999 yields have only been higher in 2000. The 3.13% hit back then is about to get tested. At the heart lie … fiscal risks. The topic will continue to draw attention all week as Trump’s bill gets discussed in the House and given the relatively light eco calendar, with the exception of Thursday’s PMIs. That should offer downside to US/core bond yields. In terms of market momentum, we could see some hesitation or consolidation after a recent push towards the levels seen in the aftermath of Liberation Day. EUR/USD remains trapped in a sideways trading range where 1.14 serves as an intermediate resistance area. Sterling hovers north of EUR/GBP 0.84. Yesterday’s announcement of a broad-ranging post-Brexit deal where defense lies at the center had limited impact. The UK releases CPI numbers tomorrow.
 

News & Views

•          The Reserve Bank of Australia (RBA) this morning cut its policy rate by 25 bps to 3.85%. The RBA said demand and supply are closer towards balance. Inflation continues to ease. Trimmed mean Q1 annual inflation (2.9%) for the first time since 2021 returned below 3.0% and headline inflation (2.4%) remained within the 2-3% target band. New forecasts indicated that headline inflation might drift back higher due to temporary factors, but underlying inflation would to stay around the mid-point of the 2-3% target. (International) uncertainty remains high and might have adverse effects on the economy. Even so, the RBA assess that domestic demand appears to have been recovering, that real household incomes have picked up and that the labour market remains relatively tight. Still businesses continue to report weakness in demand. The RBA expects GDP growth to pick up, but at a more gradual pace than initially expected (2025 2.1%; 2026 2.2%). The outlook for inflation also has been revised a little lower (trimmed mean EoY 2025 and 2026 2.6% from 2.7%). Markets expected a more hawkish assessment. The 3-y bond yield dropped 10 bps to 3.53%. Money markets see two more cuts this year with the next 25 bps step fully discounted for August. The Aussie dollar eases marginally (0.644), holding within the recent narrow range (0.6315/0.6515).
•             The head of the Swiss National Bank (SNB), Martin Schlegel, in a speech said that inflation in the country can turn negative in certain months this year. Y/Y inflation in the country printed at 0.0% in April. The SNB head pointed to a negative contribution from external factors. With giving guidance on next month’s policy meeting, Schlegel indicated that the interest rate is very important for the exchange rate. In this respect, the SNB according to Schlegel, is prepared to bring the interest rate into negative territory if required. Interest rates remain the main policy tool of the SNB, but FX interventions might also be put in place. Markets expected SNB to cut the policy rate from 0.25% to 0.0% in June. EUR/CHF, after a CHF rally early April, recently held a tight range between 0.93 and 0.945.

Graphs

German 10-y yield

At the April meeting, confidence that inflation is returning to 2.0%, allowed the ECB to reduce to policy rate to 2.25%, reaching neutral territory. The ECB now moves to an outright data dependent approach, but overall uncertainty remains elevated. This could lead to a prolonged policy pause. At the same time, German bunds ever more gain safe haven status as uncertainty with respect to US assets intensifies. This for now slows the rise in LT Yields.
 

US 10y yield

The Fed’s March forecasts were full of stagflation risks, but priority stayed on inflation until growth is visibly weakening. It means the extended pause announced got confirmed, supporting the bottom below front end yields. The long end remained more vulnerable for how the explosive policy mix could backfire to the US economy. After a temporary easing of risk premia, US yields are now again trending higher on delayed rate cut expectations.

 

Calendar & table

Contacts