KBC Sunset Market Commentary 11/02/2025 via Trader Talent

KBC Sunset

Tuesday, February 11, 2025

Daily Market Overview

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Markets

• Bear steepening of yield curves is the main – and only -expression of the new step-up in trade threats. US President Trump is preparing universal (except for Australia) 25% tariffs on steel and aluminum imports by March 12. EC President von der Leyen already responded saying that “unjustified tariffs on the EU will not go unanswered”. They earmarked a list of €4.8bn of US imports with trade ministers tomorrow meeting to discuss potential next steps. Von der Leyen will tomorrow also meet US vice-president Vance in Paris to discuss the issue. EU swap rates add 3.8 bps (2-yr) to 6.8 bps (30-yr) today with US yields adding 1.5 bps (2-yr) to 4.6 bps (30-yr). Markets clearly fear the inflationary impact which might mean restrictive monetary policies for longer. The trade narrative had little impact on EUR/USD (1.0320) with European stock markets currently even looking at 0.5% gains after an hesitant start. The eco calendar was empty apart from a larger-than-expected setback in NFIB small business optimism for the month of January (102.8 from a 6-yr high of 105.1 vs 104.7 expected). Details showed a strong rise in the uncertainty indicator suggesting investments could slow. The title of Cleveland Fed Hammock’s speech – “Show me the low inflation” – spoke for itself while markets counted down to US Fed Chair Powell’s testimony before Congress. The Fed chair reiterated that there’s no hurry to adjust policy rates. Conditions in the labour market are broadly balanced with the Fed being attentive to risks on both side of its mandate. The comments broadly reflected the mood set out at the January FOMC meeting, with markets shrugging them off.
• Bank of England Mann elaborated further on her call to cut the central bank’s policy rate by 50 bps instead of 25 bps last week. The move came as a surprise as Mann dissented back in November in favour of stable rates instead of a 25 bps rate cut. Mann thinks that the downturn in the jobs market will make the inflation hump this year short-lived. She wanted to send a strong signal about the BoE’s intentions, but that doesn’t mean that she sees a need for fresh cuts in the immediate future: “a larger move is a superior communication device” but interest rates are still expected to settle at a higher level as structural impediments keep inflation at 2%. UK money markets only attach a 25% probability to a follow-up move in March which we don’t think will happen. Sterling is slightly stronger against the euro (EUR/GBP 0.8325) but the intraday move isn’t related to the BoE comments.

News & Views

• Hungarian prices in January rose a consensus-beating 1.5% m/m. The 5.5% y/y reading was the highest in over a year. They also represented a significant quickening from December’s 0.5% and 4.6% thanks to food (1.9% m/m), services prices (2.2%), energy (1.7%) as well as alcoholic beverages and tobacco (1.5%), the Hungarian Central Statistical Office said. The flavour of the core gauges constructed by the central bank (MNB) were similar with all three of them varying between 5.4% and 5.6%, up from the 4.7%-5.4% range in December. The MNB targets an inflation rate of 3% and allows a 1 ppt deviation on either side. It held within the upper bound of the tolerance range for most of 2024 before breaking out again since December. The Hungarian forint has had a good run over the last couple of weeks and is extending gains today to EUR/HUF 403.8. But regardless of the decent HUF performance, which is a key variable watched by the MNB, today’s numbers clearly question the remaining (if any) room to cut rates further from the current 6.5%. Hungarian swap rates surge up to 20 bps at the front end of the curve. FRA pricing no longer suggest any rate cut over the next 12 months.
• Poland’s Climate Minister Hennig-Kloska said the government may need to extend the power price cap again after it expires in Q3 of this year. Electricity prices are currently around PLN 600/MWh and Hennig-Kloska said that the motions to be prepared in April by utility companies for the new tariffs probably won’t go as low as the current price cap of PLN 500/MWh. “Intervention” of freezing prices will thus still be needed, she said. The price cap is one of the key reasons why the Polish central bank (NBP) is refraining from cutting rates, citing the upward impact on inflation when the cap gets lifted eventually. By extending the cap, inflation remains (artificially) lower but from the central bank’s point of view it’s probably just kicking the can further down the road. The Polish zloty remains very well bid, banking on the hawkish monetary policy stance. EUR/PLN is testing the 2025 low around 4.175, in turn the strongest PLN level since 2018.