KBC Sunset Market Commentary 14/03/2025 via Trader Talent

KBC Sunset

Friday, March 14, 2025

Daily Market Overview

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Markets

• After yesterday’s tariff-driven risk-off (Trump threatening 200% levy on EU wines and other alcoholic beverages), sentiment again turned risk-on on news from outside the US. Asian markets drew some comfort from Chinese authorities expected to announce measures to support domestic demand/consumption next week. Around noon, European markets were propelled by the announcement of an agreement in Germany between the prospective new chancellor/CDU leader, Merz and the Greens on a spending package for infrastructure and defense, adjusting strict German debt rules. The Greens received concessions that some of the additional spending will be used for their (climate) priorities. The defense parameters of the initial plan were also extended. Still, the basics of the intended loosening of German fiscal conditions were left intact. The German yield curve resumes its steeping trend with yields adding between 1.5 bps (2-y) and 4.5 bps (10-y). The announcement also blocked a developing correction of the euro. EUR/USD briefly regained to 1.09, but Tuesday’s 1.0947 correction stayed out for reach and momentum remains unconvincing going into the weekend (currently 1.0875). European equities gain further traction (EuroStoxx 50 +1.2%). US yields joined the rebound in Germany. However, the U. of Michigan consumer confidence showed worst possible combination of a sharp decline in confidence (57.9 from 64.7, with especially the expectations component falling off a cliff 54.2 from 64.0) and a sharp jump in inflation expectations (1-y 4.9% from 4.3%, 5-10 y 3.9% from 3.5%). Remarkably, this stagflationary narrative had limited impact on (US) markets, at least for now. US yields are rising 2-3 bps across the curve. US equities also stay well in positive territory (Nasdaq 1.25%). Overall, USD shows a mixed picture (DXY 103.7). Risk-on sentiment weighs on non-USD safe haven currencies, including the Swiss franc (EUR/CHF 0.963) and the yen (USD/JPY 148.5)
• UK (interest rate) markets of late were an area of relative calm compared to US and EMU markets. The latter two were haunted by rising uncertainty on growth due to Trump policy and/or the fiscal U-turn Germany/Europa. Recent UK eco data also didn’t provide strong market guidance. Most recent inflation (Jan) and wage (Dec) data suggested there was little room for the BoE to move to a growth supportive policy anytime soon. However, with next week’s BoE meeting looming, weak January production (-0.9% M/M; -1.5% Y/Y) and monthly GDP data (-0.1%) didn’t go unnoticed. Ceteris paribus, these data suggest that the UK government has little room in its difficult balancing act to support growth, raise defense spending, but at the same time adhere to a self-imposed budgetary discipline. The BOE is widely expect to keep its policy rate unchanged next week, but might be milder and play its role in supporting growth at some point in the future. UK Gilts outperform Bunds and Treasuries with yields showing only marginal changes. Sterling weakened back above the EUR/GBP 0.84 handle.

News & Views

• Polish inflation slowed more than expected, from 1% M/M in January to 0.3% in February (vs 0.4% expected). An annual basis, inflation stabilized at a downwardly revised (annual update of weighting system) 4.9% Y/Y. Headline CPI has been hovering between 4.7%-4.9% Y/Y since September 2024. Polish goods and services inflation respectively rose by 0.2% M/M (4.3% Y/Y) and 0.8% M/M (6.6% Y/Y). The highest monthly contribution came from higher prices related to recreation and culture (by 2,7%), alcoholic beverages and tobacco (by 1,3%), dwelling, food (by 0,2% each), health (by 0,8%) and restaurants and hotels (by 0,7%). Lower prices were seen in transport (by 0,6%) and clothing and footwear (by 1,5%). Polish markets didn’t respond to inflation numbers in the wake of the NBP meeting earlier this week where the central bank suggested to inflation would only return to the 2.5% target by 2027. The Polish zloty is again better bid in today’s positive risk climate with EUR/PLN dropping towards 4.17.
• The Bank of England published its quarterly inflation attitudes survey, conducted by Ipsos. Median expectations of the rate of inflation over the coming year were 3.4%, up from 3% in November 2024. Expectations for the year after that increased from 2.8% to 3.2% and those for the longer run (5y) rose from 3.4% to 3.6%. By a margin of 71% to 4%, survey respondents believed that the economy would end up weaker, rather than stronger, if prices started to rise faster, compared to 66% and 6% respectively in November. Today’s survey argues in favour of a rate pause at next week’s BoE meeting, in line with market expectations.