KBC Sunset Market Commentary 18/02/2025 via Trader Talent

KBC Sunset

Tuesday, February 18, 2025

Daily Market Overview

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Markets

• The focus of markets (and the international community) was on the talks in Riyadh between Russia and the US to end the war in Ukraine. The two parties agreed to appoint high-level teams to work ‘on a path to ending the conflict in Ukraine as soon as possible in a way that is enduring, sustainable, and acceptable to all sides’. For now, this brought little new for markets. Returning after the long weekend, US yields are rising between 2 bps (2-y) and 4.5 bps (30-y). Fed’s Waller indicated to leave rates unchanged until inflation moderates further (which he still expects). The NY empire manufacturing survey was stronger than expected (5.7 from -12.6, with also prices series jumping higher). EMU yields are taking a breather after yesterday’s rise/steepening on expectations of higher defense/fiscal expenditure. German yields are changing less than on bps across the curve. Despite ‘noisy/diffuse’ geopolitical and economic headlines of late, German ZEW investor confidence improved more than expected (expectations 26 from 10.3, 20.0 expected). ZEW comments that “Shortly before the day of the federal election, economic expectations have clearly improved in February. This rising optimism is probably due to hopes for a new German government capable of action. Also, after a period of absent demand, private consumption can be expected to gain momentum in the next six months’. European equities remain well bid, with the Eurostoxx50 touching a new record. The S&P 500 is also only a whisker away from record levels (+0.2%). Despite the risk-on, USD slightly outperforms with DXY returning to the 107 level. EUR/USD (1.045) is falling prey to profit taking as the 1.0533 YTD top serves as resistance for now.
• The monthly UK eco update that will unfold this week, this morning started with a positive surprise. Labour data painted a better picture than signaled by survey evidence of late. The latter suggested a negative reaction of employers to higher social security contributions from the October budget. Still data were stronger than expected across the board, with the unemployment rate holding at 4.4% and January payrolls rising 21k vs a 30k decline expected. Maybe most important from a monetary policy point of view was (private sector) pay rising 6.3% (3M average Y/Y). This was no big surprise, not for markets and not for the BoE, but remains a reason for the BoE to hold a cautious approach on further policy easing. The immediate market reaction to the data was modest. UK Gilts underperform Bunds with yields rising between 3.5 bps (2-y) and 4.3 bps (30-y). Money markets currently only fully discount two additional 25 bps BoE cuts later this year, with less than 50% seen on a third step. In a public appearance today, BoE government Bailey are already looked forward to an expected uptick (to be published tomorrow) in the January inflation (expected to rise from 2.5% to 2.8%Y/Y). However, he tentatively downplayed this as mainly due to regulated prices rather than mirroring the underlying state of the economy. EUR/GBP tries to break the 0.83 big figure. For now sterling holds its recent gains, but no big follow-through gains yet.

News & Views

• The governors of the Spanish, German, Italian and French central bank in a letter to the European Commission urged to simplify the wide array of rules for commercial lenders in “areas where the European framework is unduly complex and may create competitive distortions at international level, without any significant financial stability benefits.” While the letter comes as the US economy under president Trump is probably set for a broad-based wave of deregulation, the central banks said they are not calling for less strict rules as such, but only to streamline them and make them easier to comprehend and thus implement.

• Canadian inflation in January printed at a consensus-matching 0.1% m/m and 1.9% y/y on a headline basis. The uptick from December’s 1.8% was largely due to energy (5.3% y/y) and was partially offset by a sales tax break for food and restaurant meals (-5.1% y/y). Core measures, however, quickened more than expected to an average of 2.7% compared to 2.55% in December. Combined with the strong shape of the labour market of late, it makes another rate cut by the Bank of Canada at the March 12 meeting increasingly unlikely. Market odds currently stand at 36% compared to 50% just yesterday. The BOC in January slowed down the pace of cuts from 50 bps to 25 bps, highlighted the cumulative amount of monetary easing done so far but didn’t offer specific guidance for what’s next. The BoC did warn for potential US tariffs to test the economy’s resilience. US president Trump has delayed a 25% levy from February to March 4. The Canadian dollar reacted muted with USD/CAD hovering around 1.42.