KBC Sunset Market Commentary 17/03/2025 via Trader Talent

KBC Sunset

Monday, March 17, 2025

Daily Market Overview

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Markets

• Some final input to the Fed policy meeting on Wednesday included February retail sales and the NY’s manufacturing confidence index for March. The former printed mixed, coming in at 0.2% m/m today, missing the 0.6% analyst estimate. In addition, the January print was revised downwards to -1.2%. Core gauges, however, were in line or better than expected. The most important one of them all, the control group (ex. food, gas, building materials and car dealers) used for GDP calculations, rose 1% m/m, the most since September last year and far more than the 0.4% expected. Below the surface, we spot weaknesses in the only services-related category (eating & drinking down 1.5% m/m) while several other categories merely rebounded after a poor January month. The NY confidence gauge for its part fell off a cliff, dropping from 5.7 to -20 (-1.9 expected). The 25.7 point drop came amid falling new orders, shipments and employment. The six-month ahead reading fell for a second-month straight to the lowest in over a year. Prices paid, meanwhile, rose in both series to a two-year (or more) high. It's mounting evidence, after Friday’s consumer confidence, of a potentially stagflationary scenario materializing in the US. This leads to a flatter yield curve with rates up 1.5 bps at the front but 3.5 bps down at the longest maturities (30-yr). The German curve flattens too in a move outperforming Treasuries. Yields at the very long end decline 9.5 bps. Germany’s outgoing parliament officially votes on the huge debt package tomorrow. After securing support from the Greens last week, this should be a non-event. But perhaps markets are closing some Bund-short positions ahead of the deal in a buy the rumour, sell the fact alike move that we in any case don’t expect to go very far. Either way, it’s not hurting the euro, not against the dollar at least. EUR/USD makes another attempt to take out 1.09 with the backing of a risk-on equity climate. Stocks in Europe add 0.7%, Wall Street trades 0.4% higher. The trade-weighted dollar index is holding tight in the very narrow sideways trading range of the last couple of days between 103.37 (November 2024 correction low) and 103.98 (61.8% retracement on the September 2024 – January 2025 rally). Sterling recoups some of Friday’s losses with EUR/GBP 0.84 at stake. JPY underperforms its major peers. USD/JPY rises towards 149. Currencies Down Under are among the top performers today. The AUD (0.635 against USD) and NZD (0.58, highest since mid-December) draw comfort from new stimulus measures announced by China which should support private consumption.

News & Views

• The OECD released its interim economic outlook today, titled “steering through uncertainty”. Global GDP growth is expected to moderate from 3.2% in 2024 to 3.1% in 2025 and 3.0% in 2026, with higher trade barriers in several G20 economies and increased policy uncertainty weighing on investment and household spending. Details show a difference between decelerating US and accelerating European growth. Over 2025-26 inflation is projected to be higher than previously expected, although still moderating as economic growth softens. Headline inflation is projected to fall from 3.8% in 2025 to 3.2% in 2026 in the G20 economies. Underlying inflation is now projected to remain above central bank targets in many countries in 2026. Risks to the baseline scenario include the escalation of trade restrictive measures (downside growth, upside inflation). The OECD recommends monetary policy to remain vigilant against inflation risks and calls for fiscal actions to ensure debt sustainability. The latter goes against current political trends. The OECD wants to see ambitious structural policy reforms to improve the foundations for growth.

• UK Chancellor Reeves in an interview with Bloomberg defended her fiscal rules in the run up to the government’s Spring statement (March 26): “When we’re spending £100bn a year on servicing government debt, I don’t think anyone could seriously argue that we don’t need to get a grip of government borrowing and government debt”. She’s expected to announce spending cuts (eg social security spending) in order to meet her fiscal rule which requires day-to-day spending to be covered by tax receipts as her £9.9bn buffer from the Autumn budget already evaporated because of higher rates and lower growth forecasts.