KBC Sunset Market Commentary 04/06/2025 via Trader Talent

KBC Sunset

Wednesday, June 4, 2025

Daily Market Overview

Click here to read the PDF-version of this report

Markets

• The award for fastest analysis of today’s ADP employment report goes to… US President Trump. “ADP NUMBER OUT!!! “Too Late” Powell must now LOWER THE RATE. He is unbelievable!!! Europe has lowered NINE TIMES!” We break the analysis down into three parts. First we forgive him the mistake that Europe has lowered rates SEVEN times (by 25 bps) so far. If they do so again tomorrow, it’s nevertheless cumulatively (200 bps) double the amount than the Fed (100 bps in Q4 2024). Second, he’s stepping up the pressure against Fed chair Powell again, a mistake that cost him/his administration dearly earlier this year through loss of investor confidence. Both met in person on May 29. According to the Federal Reserve, the meeting did not include discussions about interest rates. Instead, it focused on general economic developments such as growth, employment, and inflation. Anyway, Fed Chair Powell reiterated that the Fed solely focuses on economic data and won’t abide to political pressure. The US central bank is in wait-and-see mode with the needle currently stuck on (upside) inflation (risks) instead of (downside) employment (risks). Once the unemployment rate starts shooting higher, the Powell Fed nevertheless won’t hesitate to shift its focus in a reactive rather than an anticipative manner. They did the same in September last year when they kicked off the policy normalisation process with a bumper 50 bps rate cut after the Sahm rule recession indicator was triggered in Summer months. The rule suggests high recession risks if the 3-month moving average of the unemployment rate exceeds its lowest level from the past 12 months by more than 0.5 percentage points. For that to happen on Friday with May payrolls, the unemployment rate needs to rise from 4.2% in April to 5.2%. Consensus expects a stabilization… Finally, there’s the ADP employment report which keeps the stagflation narrative intact. Private sector employment increased by 37k in May, less than 114k expected and the lowest tally since March 2023, but hiring still. While hiring is losing momentum after a strong start to the year, pay growth was little changed, holding a robust level for both job-stayers (4.5% Y/Y) and job-changers (7% Y/Y). Whereas the US Treasury market focused on the “FLATION” part of the story following Monday’s manufacturing ISM, they now eyed the “STAG” part going into Friday’s payrolls. US Treasuries rallied with the curve bull flattening. US yields currently cede 3.7 bps (2-yr) to 6.6 bps (30-yr) in a move which has more potential in case of a weak non-manufacturing ISM to be released later today. The outcome for the US dollar is the same as on Monday: downhill with EUR/USD currently trading back above the 1.14 handle. Losses for US equity futures remained limited.

News & Views

• Czech consumer prices rose by 0.5% m/m in May, driving the annual rate from 1.8% to 2.4%. That’s more than the market (2%) and the Czech central bank (2.3%) expected. May's upside surprise was largely due to food, which together with alcohol had risen more sharply month over month (1.3% vs. 0.9%). There’s no detailed structure yet, but it seems that services’ inflation momentum was increasing while energy became somewhat cheaper. Looking ahead, KBC Economics expects a short-term inflation peak of close to 2.8% in June. Subsequently, inflation should start to gradually return to the inflation target over the summer and autumn. KBC Economics is keeping the 2025 annual estimate at 2.3%. In a separate release, wage growth slowed only slightly at the start of 2025. According to today's release, annual average wage growth slowed from 6.9% at the end of 2024 to 6.7% in 2025Q1. The numbers suggest a still relatively tight labour market with only gradually fading strong wage dynamics that so far continue to outpace labour productivity dynamics. It’s a key concern and reason for the central bank to tread carefully on future (if any) rate cuts. The Czech crown rallied on the release with EUR/CZK touching a new one-year low. Czech swap yields sprint between 5 and 11 bps higher across the curve.

• Bulgaria took another key hurdle in adopting the euro by securing the European Commission’s positive recommendation today. The EC together with the ECB finished the convergence report and both concluded that the one remaining obstacle – above-target inflation – was cleared. It is now up to EU government leaders to discuss Bulgaria’s ascension bid at the June 26-27 summit before finance ministers giving the final approval on July 8. That would leave the country enough time for adoption by 2026.