KBC Sunset Market Commentary 07/02/2025 via Trader Talent

KBC Sunset

Friday, February 7, 2025

Daily Market Overview

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Markets

• The long-awaited re-evaluation of the neutral rate in the euro area turned out to be much ado about nothing. Estimates varied widely depending on the measurement technique. What mattered most in the end was whether or not the bottom of the pre-pandemic 1.75-2.5% range had risen in this new era. The ECB is guessing that it didn’t. The practical implication is that the central bank could lower rates as low as 1.75% before adopting a supportive stance. The latter is not warranted given the lingering inflationary risks, especially in the services sector and ahead of an expected economic recovery. Two things stand out though. One is that the variability at the lower bound estimates decreased sharply compared to pre-2020, which does reveal some upward pressure on the neutral rate. Second is that the staff paper goes at length trying to downplay the usefulness of this theoretical, unobservable neutral rate for actual policymaking. ECB chief economist Lane did the same earlier this week as part of an unusually hawkish speech. It suggests, if anything, that the ECB wants to at least contain (too dovish) market expectations. Money markets already almost fully price in four additional moves (to 1.75%).
• Moving on to the next potential market moving candidate for today: US payrolls. Job growth remains solid. The January outcome of 143k was slightly below expectations (175k). But November and December saw a combined 100k upward revision. The household survey, just as in December, tells a similar story with 223k employment growth. That was more than enough to offset the increase in labour participation (rate rose to 62.6%), leading to an unexpected decline in the unemployment rate to 4%. To top it off, wages grew an above-consensus 0.5% m/m to 4.1% y/y. Yearly wage growth now appears to be stabilizing around 4%, significantly above the levels seen prior to the pandemic. US yields dropped up to 7 bps in a kneejerk reaction to what a small headline miss to begin with anyway. It reveals market sensitivity is currently skewed to downside surprises. US rates erased losses and more as the strong details began to sink in. They currently trade 4-5.4 bps higher across the curve. We’re now spotting the first signs of a bottoming out process. US yields pull European rates a few bps higher as well. The Fed’s extended rate pause (at least through June) gets firm market backing now. The next first full rate cut isn’t priced in before September. Dallas Fed president Logan during yesterday’s BIS event even openly pondered whether more cuts are necessary this year at all. The dollar is trading extremely stoic with a tiny strengthening bias. EUR/USD trades around 1.036, DXY just south of 108 and USD/JPY at 152. Both European and US stock markets trade little changed.

News & Views

• Canadian employment rose by 76k in December, building on the solid 91k pace from December and beating consensus (25k) by a wide margin. Details showed an increase in both full-time (+35.2k) and part-time (+40.9k) occupations. Employment gains in January were led by manufacturing (+33k; +1.8%) and professional, scientific and technical services (+22k; +1.1%). The unemployment rate avoided the feared uptick from 6.7% to 6.8% and even declined to 6.6%. This occurred even against the background of a higher participation rate (65.5% from 65.4%). Average hourly wages rose by 3.5% Y/Y (down from 4% in December). The Canadian dollar holds the balance with a strong USD today as the numbers reduce the likelihood that the BoC will implement more rate cuts even as the lingering tariffs pose significant downside risks to the Canadian economy. USD/CAD is testing first support in the 1.43-area. A break lower would make the technical picture in the pair more neutral. CAD swap rates add 7 to 9 bps across the curve.
• The Turkish central bank published its updated inflation outlook. The CBRT raised the end of year forecast to 24% from 21% with a projection band of 19%-29%. It added that it was mostly a mechanical revision driven by factors beyond the control of monetary policy. It doesn’t suggest any easing of the monetary policy stance. The end-2026 forecast was unchanged at 12% while a first prognosis for end-2027 came in at 8%. The CBRT sets the policy rate in a way to ensure the tightness required by the projected disinflation path. In December and January, they conducted back-to-back 250 bps rate cuts to bring the policy rate at 45% currently. EUR/TRY trades sideways (36-38.50) near record highs since last summer.