KBC Sunset Market Commentary 08/01/2025 via Trader Talent

Daily Market Overview

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Markets

•          With or without data, global bond markets stay under pressure. In particular for the long end of the curve, comments often mentioned ‘The highest level since….’. The UK was again hit the hardest, with yields rising between 12 bps (10-y) and 6.5 bps (2-y). A high financing need as the government wants to roll out its growth supportive agenda and inflation holding too high for the BoE comfortably start a genuine easing cycle, dents investors’ appetite to pick-up gilts even at current ‘historically high’ returns. Yesterday, the UK 30-y forced a break higher touching the highest level since 1998. Today, the 10-y (tentatively?) develops a similar pattern reaching levels not seen since July 2008 (4.80% area). German November retail sales (-0.6% M/M) and even more factory orders (-5.4% vs -0.2% expected) again disappointed as did EMU economic confidence. Even so, it also didn’t help European bonds. German yields add between 5.0 bps (30-y) and 1.2 bps (2-y). The  7 bps rise in the 10-y yield was partially due to a benchmark change. Even, the 10-y German yield easily cleared the 2.5% resistance (November top). US curve steepening also continues, admittedly at a slower pace (30-y +4.0 bps, 2-y minus 0.5 bp). Eco data were mixed. ADP private job  growth was slightly softer than expected (122k from 146k) but weekly jobless claims stay low (201k from 211k) and suggest ongoing labour market resilience. US bond markets got some relief from comments by influential Fed governor Waller. He expects inflation to slow further allowing the Fed to reduce rates further as 2025 proceeds. He also downplayed the idea that higher import tariffs will profoundly change the picture going forward. Still, the US 10-y is closing in on the 4.73% level (April 2024 top), the last technical hurdle before the  5.02% cycle top (Oct 2023). Investors later today for sure will scrutinize the internal debate within the Fed in the December meeting minutes. The $22 bln sale of 30-y US government month also will be more than closely watched with little room for disappointment. The ongoing rise in yields initially also triggered further equity sales before investors took some comfort for the Waller comments (S&P 500 little changed, Eurostoxx 50 -0.6%).
•          Rising (relative) interest rates support doesn’t help the likes of the euro or sterling. In current high alert modus, higher yields are seen as risk premia and allow the dollar to attracted safe haven flows.  DXY rebounded from the 108.7 area to currently trade near 109.11. After briefly regaining 1.04 yesterday, EUR/USD again trades near 1.03. Despite (or is it because) higher yields, sterling also underperforms the single currency (EUR/GBP 0.834 from 0.829).
 

News & Views

•           Swedish inflation undershot expectations for December. Headline prices (using a fixed mortgage rate) rose by 0.3% to 1.5%, marking a faster deceleration from November’s 1.8% than the 1.7% expected. The core gauge (excluding energy) also eased a bit more than expected, from 2.4% to 2.1% y/y on a 0.4% monthly pace. Today’s numbers put little in the way for the central bank to further cut the policy rate (2.5%) during the January 29 meeting. The Riksbank at the December one flagged it would do so “in the first half of 2025”. It tweaked guidance somewhat to hint that this might be the final one this cycle, citing the lagged effects of monetary policy on the economy and inflation. The updated forecasts told a similar story with a 2.25% policy rate penciled in over the horizon through 2027. Money markets never really bought into the story though and in the meantime have priced in at least two more 25 bps cuts by May this year. Given the already more aggressive positioning compared to Riksbank guidance, markets for now do not push it further just yet. This also meant the SEK barely budged on the CPI miss. EUR/SEK moves around 11.5.
•          The ECB in an Economic Bulletin article published today offered (part of) the explanation why the consumption-led rebound it has been predicting for some time now is not yet materializing. It said that euro zone households have been saving a large portion of their income to rebuild wealth after being eroded by inflation the last couple of years. Real net wealth has declined the past two years, the ECB said. Latest data available showed families saving 15.7% of their disposable income (Q2 2024) compared to 12-13% prior to the pandemic. The result are ever-growing piles of savings. The central bank nevertheless continues to expect consumption to eventually relive , with a “likely downtick in the saving rate together with continued strong growth in real labour income” to help momentum.
 

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