KBC Sunset Market Commentary 12/03/2025 via Trader Talent

Daily Market Overview

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Markets

•          Risk sentiment improved today as markets welcomed the US-brokered Ukrainian backing of 30-day full truce along the entire frontline even as the US still needs to convince Russia to do the same. It could mark the start of broader peace talks. The US’s universal 25% tariff on steel and aluminum was expected and met with European countermeasures. In theory, the tariff story could move to the background for some days with the next deadline for reciprocal tariffs coming on April 2nd. In the Trump-era, that’s a lifetime away. Main European stock markets recover up to 1% after a two-day beating, but intraday sentiment is waning. German/European yields stuck to recent gains, with the front end of the curve this time slightly underperforming. Eyes were on Frankfurt for the start of the ECB and its watchers conference. In her key note speech, ECB President Lagarde warned for exceptionally high uncertainty related trade policy and geopolitics. Inflation may become more volatile and persistent due to larger shocks to inflation. She avoided giving any specific guidance on future policy though: maintaining stability in a new era requires a strong commitment to the inflation target, the ability to identify which shocks require a monetary reaction, and the agility to respond appropriately. EMU money markets are tilting to a rate cut pause at the April meeting (60-40). We think tactics will eventually decide on the outcome instead of economics. In a compromise to hawks on the MPC, the ECB could lower rates a final time and simultaneously flag a larger pause to await how fiscal developments play out. The Fed used the same playbook around the turn of the year. In any case, we see it more likely that 2.25% will be the bottom instead of the currently discounted 2%. Focus in the US turned to February inflation numbers. Both headline and core inflation slowed down to 0.2% on a monthly basis while consensus expected a 0.3% pace. On an annual basis, inflation slowed slightly more than hoped, respectively from 3% to 2.8% and from 3.3% to 3.1%. Core goods inflation went from 0.3% M/M in January to 0.2% M/M with core services down to 0.3% M/M from 0.5% M/M. The February data suggest that the disinflationary impact from Trump’s explosive policy mix, weighing on spending, for now outweighs the inflationary impact from tariffs. The dollar and short-term US yields spiked lower, but the move didn’t last for five minutes. US yields currently trade around 3 bps higher across the curve. EUR/USD trades a tad softer today, changing hands near 1.0880. US stock markets opened flat (Dow) to 1.5% higher (Nasdaq).
 

News & Views

•          The ECB’s updated wage tracker confirmed January’s projection of rising by an annual 1.5% in the fourth quarter of this year. It’s a sharp deceleration from the 5.3% peak in 2024Q4 and adds to the evidence the ECB is looking for that the current strong wage growth should ease eventually. This is expected to usher in a more marked disinflation in the labor-intensive services sector (currently 3.7%), in theory paving the way for further rate cuts. The recent fiscally-related developments could thwart those monetary easing intentions, though. The ECB also added a technical disclaimer to the steep decline the tracker projects later on. “The steeply downward trend of the forward-looking wage tracker in 2025 partly reflects the mechanical impact of large one-off payments (that were paid in 2024, but drop out in 2025) and the front-loaded nature of wage increases in some sectors in 2024.”
•          The Bank of Canada cut policy rates by 25 bps to 2.75% today. The statement makes multiple references to the trade conflict, with the “pervasive uncertainty created by continuously changing US tariff threats (…) restraining consumers’ spending intentions and businesses’ plans to hire and invest.” The resulting slowing growth will offset the stronger Canadian performance seen at the end of last year (2.6% Q/Qa). “Recent surveys suggest a sharp drop in consumer confidence and a slowdown in business spending as companies postpone or cancel investments.” The central bank refrained from giving any guidance. It does stress that it cannot offset the impact of a trade war (which in nature is a supply shock) but that it must ensure that higher prices do not lead to sustained inflation. In setting policy it will balance both the downward pressures on inflation from a weaker economy and the upward pressures from tariff-related higher costs. The Canadian dollar reacts muted to the expected policy decision with USD/CAD hovering north of 1.44. Swap yields add a few bps across the curve.
 

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