KBC Sunset Market Commentary 13/03/2025 via Trader Talent

KBC Sunset

Thursday, March 13, 2025

Daily Market Overview

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Markets

• EUR/USD’s stellar rally over the last couple of days ran into resistance recently. After hitting 1.09 for the first time since October of last year, it is trading around 1.085 currently on a combination of both euro weakness and dollar strength. We spotted a few drivers, including a special session in the outgoing German parliament today to discuss the €500bn infrastructure fund and the sweeping changes to the country’s debt brake proposed by the CDU/CSU and SPD. While it’s widely assumed the Greens, whose support is critical in reaching the two-third majority, will support it eventually, they are aiming for some last minute concessions. They have time on their side with the final vote scheduled for next Tuesday. The political scene undermines some of the initial optimism. Next we have Donald Trump. The US president is on a roll again on Truth Social, threatening the EU with a 200% tariff on wine, champagne and other alcoholic beverages. The rant came as the EU unveiled countermeasures, including a 50% tariff on imported bourbon, in response to the 25% US levy on steel and aluminum introduced earlier this week. Finally, Russia poured cold water over the US-Ukrainian 30-day ceasefire agreement. President Putin’s foreign policy adviser told state television that they don’t want a temporary truce and instead push for a long-term peace settlement that takes into account all of their “concerns”. The rejection comes as Russia is gaining the upper hand in the Kursk region, which fell into Ukrainian hands after a surprise attack last August. US officials today landed in Moscow for talks. The (geo)political developments also benefit traditional FX safe havens including JPY (in particular against the euro) and the Swiss franc. Core bonds trade mixed with US Treasury yields extending their tentative bottoming. Rates add between 1.4-2.7 bps with lower-than-expected February PPIs only temporarily interrupting the move higher. Headline PPI was flat on a monthly basis (3.2% y/y) compared to the 0.3% expected rise. Core gauges (ex food, ex energy) missed the bar too. Some of them came with an upward January revision though, offsetting some of the downside miss. It’s also likely that the March import tariffs will have upside consequences for next month’s reading. Weekly jobless claims printed in line with expectations (220k vs 225k). German Bunds outperform in a bear steepening move (2-yr eases 2.7 bps). Stock markets are back in the defensive again after yesterday’s recovery attempt. The EuroStoxx50 sheds 0.5%. WS pared opening losses between 0.4% and 1.3% to around half.

News & Views

• The Kiel IFW German economic institute in its spring economic forecast kept its projection for German economic growth at stagnation (0.0%) this year, but sharply upwardly revised its outlook for 2026 (1.5% from 0.9%). For this year, structural issues are unlikely to abate. The forecast assumes the US administration raising tariffs on German imports to further dampen GDP. Uncertainty on the US trade policy as such also is a negative in a context were the Germany already became noticeably less competitive. However, for next year, the institute assumes that some of the plans agreed in the initial government negotiations between SPD and CDU will lead to a much more expansionary fiscal policy. Investment is expected to bottom out after four years of decline to grow again in 2026 due to less restrictive monetary policy, an improving economic environment and an increase in public investment. Employment should pick up next year after falling this year. The budget deficit would rise to 3.4% of GDP in 2026, after falling to 2.4% this year. The debt-to-GDP ratio is projected to increase from 63.3% in 2024 to 65.4% in 2026. The more expansionary fiscal policy is expected to only become increasingly apparent in debt levels in the years after.
• Retail sales in the Czech Republic in January were substantially weaker than expected. According to the Czech statistical office, real sales (ex motor vehicles) decreased 0.5% M/M, easing Y/Y growth to a 7-month low of 2.7% from 6.4% in December and vs expectations of 4.2% Y/Y. Sale of automotive fuel by rose 5.4% Y/Y, of non-food goods by 3.1% and of food by 1.5%. Lower sales were recorded for information and communication equipment. Signs of subdued domestic demand, if confirmed, might support the debate on further easing by the Czech central bank (CNB). After reducing the policy rate by 25 bps to 3.75% in February, governor Michl indicated CNB would be very cautious. Vice governor Zamrazilova in an interview yesterday suggested two more cuts this year given recent inflation data (2.7%). She assessed the neutral rate to be somewhere just above 3.0%.