KBC Sunrise Market Commentary 22/05/2025 via Trader Talent

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Market Commentary

Markets

•          Yesterday’s US 20-yr $16bn bond sale was a rough one. The auction tailed 1.2 bps vs the 5.035% WI yield with lower-than-average demand. US yields ripped higher, extending earlier gains. Net daily changes varied between +4.8 bps in the 2-yr to 12.9 bps for the 20-yr. The US 30-yr yield added 12.3 bps to 5.09% and rapidly closes in on the 2023 high of 5.17%. The 5% coupon, the highest since the 20-yr tenor was reintroduced in 2020, wasn’t considered enough  and is a writing on the wall. Investors shun long-term US debt given fiscal risks to an already unsustainable deficit situation. Conditions ahead of the auction were suboptimal, to put it mildly. Shortly before the sale, House Speaker Mike Johnson said there was agreement on one of the last remaining hurdles (SALT, Medicaid), potentially paving the way for Trump’s bill to be approved by the House later today. Adding to the negative vibes was a Japanese sale that flopped on Tuesday. The tenor was the same, market concerns similar. It launched Japanese yields with maturities from 20 year on to the highest levels since at least 25 years. That prompted calls on the Bank of Japan to revise its bond buying taper plans, specifically those affecting the long end of the curve. But one of the most dovish BoJ board members said this morning he currently sees no need to. In the plan laid out last year and which is up for an interim review at June’s policy meeting, monthly buying should halve to JPY 3tn by March 2026. Japanese yield again add several bps. The bad US auction weighed on Wall Street with losses mounting to 2% (Dow Jones) as well as on the dollar. The trade-weighted index closed sub 100, EUR/USD rose to 1.133. USD/JPY eased to 143.7 and drops further to 143.3 in Asian trading this morning. JPY largely ignores an understanding between finance minister Kato and his US counterpart Bessent that FX rates should be determined by the market. Both met in the sidelines of the G7 summit in Canada and ongoing FX talks with the likes of South Korea and Taiwan is fueling speculation of the US using tariffs to arm-wrestle the broader region in letting local currencies strengthen.
•          The calendar has the sole important economic data for this week on offer: PMI business confidence indicators. We suspect the European reading to come in to the better side of expectations as trade fever eased over the last couple of weeks. We keep a close eye at the price subseries. Input cost increased slowed last month but selling prices continued to pick up. The combination of improving economic conditions and still-strong price pressures keeps European yields supported. They have been joining the broader move higher, particularly at the long end of the curve. The 30-yr swap is the one to watch for today, with the yield currently testing the 1.5 year high seen in March. We expect EUR/USD to move higher with 1.1573 (April high) serving as the first technical resistance level.
 

News & Views

•          Lower growth than previously expected slowed the efforts of fiscal consolidation by New Zealand, the proposal of the new budget showed this morning. The government expects a budget deficit at 2.6% of GDP in the fiscal year 2025/2026 (NZD 12.1 bln), compared to the expected 2.3% at in December last year. The government intends to return to a budget balance in the fiscal year 2028/29. Treasury takes a 1.2% growth into account for 2025 (from 2.1%) before accelerating to 3.1% in 2026. Both are still higher than the projections of the central bank. The lower deficit reduction plan also slowed the decline in the government debt ratio. This is expected to peak at 46.0% in 2027/28. In a first comment after the budget presentation, rating agency S&P indicated that the elevated fiscal and current account deficits weigh on the credit rating. S&P nevertheless expects that the country’s public debt will stabilize at a favourable level compared to most rating peers. New-Zealand has AA+ rating with a stable outlook. The kiwi dollar eases slightly this morning against the dollar to NZD/USD 0.5925.
•          The Japanese composite PMI in May slipped back in contraction territory, from 51.2 in April to 49.8 in May. The decline in the overall index was driven by a further contraction in out in the manufacturing sector (48.0 from 48.9) while activity in the services sector slowed materially from 524 to 50.4. S&P Global comments that demand conditions looked more fragile, with new business across both manufacturing and service sectors falling for the first time in nearly a year and foreign demand declining for the second straight month. Cost pressures remained elevated in May, but there were tentative signs that input price inflation is cooling. Business confidence is the second lowest recorded since the initial wave of the COVID-19 pandemic, due to uncertainty on the  future trade environment and foreign demand clouding the outlook for the year ahead.
 

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 slowed 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

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