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KBC Sunrise
Friday March 28, 2025

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Market Commentary

Markets

•          The US Congressional Budget Office yesterday published its projections for the US federal budget deficit and debt for the period 2025-2055. Both are expected to rise substantially further under the assumption that current laws will remain unchanged. The latter of course complicates investors’ assessment on the exact meaning of the report as it for example considers the Trump tax cuts to expire under current law. A the same time, the long term impact of current spending cuts is difficult to assess. That said, the CBO expects the Budget deficit to rise from an expected 6.2% in 2025 to 7.3% in 2055. The rise in the deficit, amongst others, is for an important part driven by higher interest rate payments (expected to rise from 3.2% of GDP to 5.4%). The debt is seen rising from 100% of GDP this year to a new post-WWII record of 107% in 2029 to reach 156% of GDP in 2055. Aside from higher interest rate payments, a slower (potential) GDP growth (1.7% compared to an average of 2.4% over the previous 30 years) further complicates debt sustainability. Lower population growth in this respect is an important factor behind slower GDP growth. The outcome was no big surprise and the market reaction was very limited. Even so, the topic of debt sustainability will remain high on the political and market agenda as the Trump administration is taking sweeping steps that are at risk to further raise the deficits and in any case limit the visibility/raise the uncertainty on the US deficit/debt trajectory going forward. US yields in technical trading yesterday changed between -2.7 bps and +1.9 bps. Fed’s Collins indicated that tariffs inevitably add to inflation. Fed’s Barkin focused on the negative impact of instability for demand. In Europe/Germany the bull steepening continues with German yields again easing between 5.0 bps (2-y) and 0.3 bps (30-y). On equity markets, the US announcing 25% tariffs on auto imports didn’t help to restore investor confidence ahead of next week’s ‘tariffs Liberation Day’. Evens so, declines on US (S&P 500 -0.33%) and European equity markets (EuroStoxx 50 -0.57%) remained orderly. The dollar ceded modest ground (DXY 104.33 from 104.62). EUR/USD rebounded to close near 1.08, not that bad given the region’s exposure to (auto)tariffs.

•          Today’s calendar is well filled with first national EMU March inflation data (Spain, France, Belgium), ECB inflation expectations and EC economic confidence. In the US the February PCE deflators are worth looking at. Soft EMU inflation data might reinforce the case for the ECB to ‘frontload’ its next rate cut to April. US deflators are expected little changed, but holding well above the Fed target (headline 2.5%, core 2.7%). Even so, data probably will have to significantly deviate from consensus for markets to engage in lasting move, with investors taking a cautious approach ahead of next week’s US tariffs announcement.
 

News & Views

•          Is its quarterly Monetary Policy report released yesterday, the central bank of Brazil (BdB) downwardly revised its GDP growth projection for 2025 from 2.1% to 1.9%, with a larger reduction in expectations for the more cyclical components. On inflation, which was already at a high level, the Bank took notice that it has risen again from 4.87% on November to 5.06% in February, 0.33pp above the December scenario and said that deanchoring risk of expectations has increased. March inflation published yesterday even printed at 5.26%. The BdB now projects that inflation remains above the upper limit of the tolerance interval (3.0% +/- 1.5%) throughout 2025, starting to fall from 2025Q4, but still staying above target. In the relevant monetary policy horizon, considered to be 2026Q3, the projected inflation still stands at 3.9%. The Bank last week raised its policy rate by 100 bps to 14.25%, and indicated a further adjustment, albeit at of a lower magnitude at its next meeting.

•          Inflation in Tokyo, often a reliable guide for where national Japanese price pressures are headed to, easily topped analyst forecasts. Prices in March rose 2.9%, accelerating from 2.8% in February and to be compared with a 2.7% forecast. The gauge excluding fresh food (favoured by the central bank) unexpectedly quickened to 2.4%, as did the narrowest indicator (ex. fresh food and energy), to 2.2%. Services prices rose by 0.8%, the fastest pace since December. It was up from 0.6% in February in a sign of building consumer momentum thanks to strong wage increases. In theory the numbers today add to a case for the Bank of Japan to hike policy rates further from the current 0.5%, potentially already at the May 1 meeting. However, comments from officials recently turned more balanced amid a darkening outlook for the global economy that’s posing risks for Japan’s as well. Money markets currently price the next hike for September but we believe the BoJ will act sooner (June or July at the latest). The Japanese yen appreciates marginally this morning. USD/JPY eases towards 150.77.
 

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

The Fed’s updated forecasts in March are full of stagflation risks, contrasting with the still-upbeat message brought by Chair Powell. The Fed’s priority remains inflation until growth is visibly weakening. It means the extended pause announced in January got confirmed, in theory supporting the bottom below front end yields. The long end remains more vulnerable for how the explosive policy mix could backfire to the US economy.
 

EUR/USD

Trump’s explosive policy mix (DOGE, tariffs) triggered uncertainty on future US economic growth with markets starting to discount the possibility of a US recession, weighing on the dollar. The euro profited from growth-lifting fiscal spending and the process towards peace in Ukraine. EUR/USD took out the 1.0804 resistance (62% retracement), opening the way for a full retracement to 1.1214 (2024 top). However, the move lost momentum of late.
 

EUR/GBP

Long end Gilt underperformance due to fiscal risks weighed on the UK currency at the start of the year. EUR/GBP tested first resistance near 0.845. Return action occurred after US president Trump seemed to be more forgiving towards the UK than the EU when it comes to tariffs. The Bank of England cut its policy rate from 4.75% to 4.50% at its February meeting and stuck to it in March with an accompanying stagflationary message not boding well for the UK currency. EUR-strength entered the equation as well.
 

Calendar & table

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