KBC Sunset Market Commentary 03/06/2025 via Trader Talent

KBC Sunset

Tuesday, June 3, 2025

Daily Market Overview

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Markets

• European inflation numbers offered the proverbial “go” for Thursday’s ECB rate cut. Prices flatlined in May with both the headline and core (ex. food and energy prices) index coming in at 0% m/m. This resulted in a 1.9% and 2.3% y/y reading, missing estimates by 0.1 ppt. The services inflation gauge is closely watched because of its ties to wage growth and eased to the slowest pace since March of 2022 at 3.2%. It’s a sharp drop from April’s 4% but not one that’s necessarily going to be repeated in coming months when the (labour intensive) tourism season kicks in. It’s nevertheless silences the likes of Austria’s Holzmann, who last week argued for skipping the June meeting. We do expect the ECB to lay the groundwork for a pause after this week’s cut to 2% to see how the fiscal spending and trade war narrative pans out in the weeks thereafter. The impact of the CPI print on FI was limited. Markets did the math already, based amongst others on earlier misses in the French and Spanish outcome. Their too aggressive positioning (terminal rate seen between 1.5-1.75%) limits the scope for even lower yields as well, particularly at the front end. European yields are down around 2 bps on the day. Bunds slightly outperform Treasuries. US yields ease less than a basis point across the curve. Gilt in the UK are well bid, pushing the longest-term yields more than 6 bps down. Bank of England’s Mann helped shape this outperformance with her speech late Monday. She said that the central bank’s QT programme is offsetting some of the BoE’s efforts to reduce restrictiveness via rate cuts. Mann thereby opened the debate on downsizing the current £100bn per year bond portfolio reduction pace. The BoE discusses the matter always at its September meeting.

• The US dollar gets some reprieve on FX markets, recouping most of its setback yesterday and ignoring the OECD’s downward growth revision (see below) in an otherwise dull trading session. EUR/USD descends from it’s one-month high around 1.145 to change hands around 1.387 currently. USD/JPY got no further than 143.35 and the trade-weighted dollar index rises to back above 99. The technical picture looks dire still though with the April multiyear low around 98 dangerously close. The dollar’s lingering vulnerability was exposed by last week’s second-tier US eco data (eg. second Q1 GDP reading and jobless claims). The eco calendar for the US starts heating up today with the JOLTS report scheduled for release after wrapping up this report. FX moves ex. USD in most cases are rangebound.

News & Views

• The OECD published its latest global economic outlook. They point to weakening global economic prospects with substantial barriers to trade, tighter financial conditions, diminishing confidence and heightened policy uncertainty all projected to have an adverse impact on growth. Global growth is expected to slow from 3.3% last year to 2.9% in both 2025 & 2026. The US, Canada, Mexico and China will take the brunt of the slowdown. The OECD pencils in 1.6% and 1.5% growth for this year and next for the US (from 2.8%) whereas EMU growth is projected to strengthen from 0.8% in 2024 to 1% in 2025 and 1.2% in 2026. Higher trade costs in countries raising tariffs are expected to push inflation up further, although the impact will be partially offset by weaker commodity prices. Downside risks around the OECD scenario include further trade fragmentation, more persistent inflation and more fiscal pressure coming from higher debt payments. Upside risks are a reversal of new trade barriers, peaceful resolutions in Ukraine and the Middle East.

• Swiss inflation rose by 0.1% M/M in May, but prices fell compared with a year ago (-0.1%) for the first time since March 2021. On a monthly basis, rising prices for housing rentals, international package holidays, fruiting vegetables and stone fruits contrasted with lower prices for air transport, supplementary accommodation and heating oil. Core inflation printed at 0.1% M/M and +0.5% Y/Y. Goods prices rose 0.2% M/M to be down 1.9% Y/Y. Services inflation stood at 0.1% M/M and 1.1% Y/Y. Today’s CPI print leaves the Swiss National Bank little choice but to further reduce its policy rate, from 0.25% to 0% at the June 19 policy meeting. The Swiss franc loses slightly ground today, trading at EUR/CHF 0.9365.