KBC Sunset Market Commentary 12/08/2025 via Trader Talent

KBC Sunset

Tuesday, August 12, 2025

Daily Market Overview

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Markets

• So far it’s a slow burn, rather than a big bang when it comes to the feared inflationary impact from US President Trump’s trade policy. Monthly headline and core US CPI inflation printed bang in line with expectations at respectively +0.2% M/M and +0.3% M/M. Annual reading showed a stabilization on the overall level (2.7% Y/Y) and an increase from 2.9% Y/Y to 3.1% Y/Y for the core gauge (matching highest level since January 2025). Core goods prices excluding new vehicles and used cars and trucks rose by 0.22% M/M, less than half the 0.55% M/M pace in June (highest since early 2022) which worried some about the potential tariff-impact. Categories like household furnishing (0.7% M/M), video and audio products (0.8% M/M) or apparel (0.1% M/M) all in all showed less than feared price increases. With two out of “three critical Summer CPI reports” (dixit Fed Chair Powell) out of the way, markets become more confident that the Fed will pull the policy normalization card when it meets next in September. First as the feared inflationary impact from tariffs remains modest. Second as activity and labour market data point to growing downside risks to the Fed’s maximum employment mandate. For the record, we must add that the supercore services gauge – stripping out energy, food, goods and housing-related costs; hyped throughout and in the aftermath of the pandemic – rose by 0.48% M/M (second highest in 16 months), lifting the Y/Y-measure to 3.21%. US Treasuries initially rallied with the front end of the curve outperforming. Daily changes on the US curve currently vary between -2.7 bps (2-yr) and +1.8 bps (30-yr). EUR/USD spiked from the 1.16 area to 1.1650, before pulling back to 1.1625. US stock markets opened 0.50% higher. A September 25 bps Fed rate cut is now nearly fully discounted. If activity data continue to disappoint in coming weeks, we err on the side of money markets starting to contemplate the possibility of the Fed pulling a 50 bps rate cut like they did in September of last year.

• We didn’t see any specific trigger, but notice an underperformance of very long German Bunds and UK gilts (both curves bear steepening) in the aftermath of the CPI release. The German 30-yr yield adds 6 bps, taking out the 2023 & 2025 highs at 3.26% to trade at the highest level since 2011. The UK 30-yr yield goes 8.2 bps higher (5.47% vs YTD top around 5.60%).

News & Views

• German ZEW investor sentiment (expectations) decreased markedly in August (34.7 from 52.7 vs 39.5 expected). The assessment of the current economic situation deteriorated as well, falling from -59.5 to -68.6 (vs -67 consensus). ZEW President Wambach said that financial market experts are disappointed about the announced EU-US trade deal. The German economy’s poor performance in the second quarter of the year played a role as well. The outlook worsened in particular for the chemical and pharmaceutical industries. Mechanical engineering, metal sectors as well as the automotive industry are also severely affected. Although initial growth estimates for the eurozone were better than those for Germany in the second quarter of 2025, these expectations have also been revised downwards for the monetary union (25.1 from 36.1).

• Indian inflation (0.93% M/M) fell below the lower bound of the 2 percentage points interval around the 4% inflation target for the first time in 8 years. A continued decline in food prices which make up half of the CPI basket was responsible for the 1.55% Y/Y headline print (down from 2.1% in June). Food prices rose by 2.03% on a monthly basis, but fell by 1.76% compared with a year ago. Core inflation slowed from 4.7% Y/Y to 4.4% Y/Y and supports the case for a rate cut by the Reserve Bank of India when it meets on October 1st. Last week, the RBI held its policy rate unchanged at 5.5%, referring to a marginal rise in core inflation as part of the rationale. The central bank voted unanimously to keep its neutral policy stance while trimming the inflation forecast for fiscal 2026 3.1% from 3.7% while retaining the growth outlook at 6.5%. The Indian rupee trades near weakest levels on record (USD/INR) with stacked tariffs (direct from the US & linked to Russian oil imports) hurting sentiment.