KBC Sunrise Market Commentary 23/05/2025 via Trader Talent

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Market Commentary

Markets

•          Yesterday’s House approval of Trump’s multi-trillion bill wraps up days of suspense going into the vote. The fiscal theme returned front-and-center since the 90-day US-Sino trade truce almost two weeks ago. Dire deficit and debt forecasts by the Committee for a Responsible Federal Budget and weak auctions in the UK, Japan and eventually in the US ($16bn 20-yr sale) all added to the negative sentiment and pressured the long end of the curve. The House vote delivered a final push, lifting the 30-yr to just 2 bps shy of the 5.17% 2023 high. But without a test, let alone break, some technical return action kicked in. Net daily changes eventually varied between -2.8 (2-yr) and -7.2 (20-yr) bps. Stronger-than-expected US PMI’s help explain the front-end’s underperformance. Both the services and manufacturing gauge rebounded to 52.3, driven by accelerating growth in new orders. Following the tariff pause, optimism for the year ahead recovered from April’s slump to its highest since January. Input costs rose sharply and was “overwhelmingly linked to tariffs”. That resulted in the sharpest rise in prices charged since August 2022. The contrasting mixed-to-weak European PMIs triggered some bull steepening and pushed EUR/USD lower, be it only marginally, to 1.128. EUR/GBP for similar reasons (UK PMIs were slightly less disappointing than the EMU ones) dipped back towards the 0.84 support area.

•          Those business confidence indicators were the only highlight on this week’s economic calendar. The ECB’s wage negotiations tracker scheduled for release today is worth mentioning but it’s unlikely to alter markets’ 100% conviction on a 25 bps June rate cut. With Trump’s bill now headed to the Senate, the fiscal theme is not at all gone but could move a bit to the background in a daily perspective and maybe even give way for the trade topic again (cf. below). Add to that long weekend ahead in the US (Memorial Day on Monday) and we’re set for a technical trading session. A weekly close of the 30-yr north of 5% would be an important signal, suggesting lingering fiscal worries. EUR/USD already recoups yesterday’s losses to trade around 1.132 but we don’t expect the move to run much further. UK retail sales for April were much stronger-than-expected, even considering the downward revisions for March. Sterling shrugs though. EUR/GBP holds steady north of 0.841. UK markets are also closed on Monday.

News & Views

•          National inflation in Japan rose slightly more than expected in April. Headline inflation held stable at 3.6% Y/Y. CPI inflation ex-fresh food, a measure closely watched by the BOJ, accelerated by from 3.2% to 3.5%. The index is touching the highest level since January 2023. Inflation ex fresh food and energy also rose from 2.9% to 3.0%. Food prices, while easing from 7.4% Y/Y in March to 6.4% remain in important source of upward price pressures. Rice prices even rose 98.4% Y/Y. Prices of utilities also accelerated (3.0% M/M and 8.4% Y/Y) due to the government phasing out support measures for gas and electricity. Service price inflation remained modest (1.3%), but this due to changes in education fees. Other topics suggest that private companies might further raise prices. Today’s CPI release is keeping the door open for the BOJ to continue is normalization process even as it currently has a wait-and-see bias to assess the impact of US tariffs on price and activity. Next BOJ policy meetings are scheduled on June 17 and July 31. Markets currently see only a very low probability of a next step at these meetings yet.

•          The Financial Times this morning reports that in the trade negotiations between the US and the EU, the US is urging the EU to make unilateral tariff concessions referring to people familiar with the discussions. These concessions are said to be necessary to make progress in talks to avoid additional 20% reciprocal tariffs. The US is said to be unhappy that the EU only offered mutual tariff reductions rather committing to lower duties alone. The EU apparently also didn’t give any indication that the digital tax may be discussed, a demand from the US. The US also wants the EU to reduce regulation and accepting US standards on food and other products, amongst other non-tariff requests. The report suggests that talks for now have made little progress in the run-up to the July 8 deadline when  the reduced reciprocal tariffs expire.
 

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. US yields are again trending higher on delayed rate cut expectations and fiscal risk premia.

 

Calendar & table

Contacts