KBC Sunset Market Commentary 18/08/2025 via Trader Talent

KBC Sunset

Monday, August 18, 2025

Daily Market Overview

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Markets

• Friday’s European bear steepening trend took a breather today. Changes on the German yield curve range between -1 bp (2-yr) and -2.7 bps (30-yr). The German 30-yr yield holds above previous technical resistance (3.26%). Last week’s steepening could have been somewhat in anticipation of the Trump-Putting meeting in Alaska with European markets starting to contemplate some kind of reflationary rebuilding vibes. While US President Trump touted the summit a “10 out of 10”in a post-meeting interview, no formal agreement was reached: “There’s no deal until there’s a deal”. A first follow-up meeting takes place in Washington today as Trump meets with Ukrainian President Zelenskyy, NATO president Rutte and several other EU leaders. Security guarantees for Ukraine even without full NATO membership are high on the (European) agenda as well as setting up a three-way summit out of this conflict. Territorial concessions are probably the key to unlock the stalemate, but remain strongly opposed by Kyiv. Chances on a near-term breakthrough seem small though. The US dollar is marginally stronger today with EUR/USD drifting back below 1.17, but holding within the narrow 1.16-1.18 range in place since the start of Summer (only temporarily breached on FOMC-payrolls combo end July/early August).

• Today’s eco calendar is uninspiring. Tomorrow unfortunately has little to offer neither. The first meaningful release are Wednesday’s UK inflation numbers. UK (money) markets have been retreating on additional BoE rate cut bets for this year after this month’s hawkish (close call) 25 bps rate cut. New CPI projections suggested UK inflation to peak at higher levels in September (4% instead of 3.7%), making it even difficult to stick to the current gradual quarterly cutting pace. Odds for such move fell to as low as 30%. It created some short term breathing space for sterling with EUR/GBP testing 0.86 support last week. Medium prospects for the UK currency remain weak though with fiscal issues and vulnerability in the Gilt market likely to pop up again in autumn. Global PMI surveys are due on Thursday but are overshadowed by this week’s main event: Fed chair Powell’s keynote address at the Jackson Hole symposium on Friday. The key question being whether he prepares markets for a policy turn at the September 17 FOMC meeting, ie backing gradual rate cuts to counter downside risks to the Fed’s maximum employment mandate instead of sticking with the current stability to fight upside inflation risks. We fear Powell will keep his cards close to his chest. The jury remains out on the issue with payrolls (Sept 5) and CPI (Sept 11) reports likely to be decisive. A 25 bps rate cut is the base scenario.

News & Views

• Rating agency Fitch this morning confirmed New Zealand’s AA+ credit rating with a stable outlook. The agency mentions a commitment to prudent fiscal policies across the county’s political spectrum even as the government in its May 2025 budget statement indicated it would only return to fiscal balance by the fiscal year ending 2029. Fitch expects the budget deficit to gradually decline to 3.6% of GDP in 2027 from around 4.2% in FY 25 and FY 26 on expenditure restraint and a cyclical recovery. Regarding the debt level, Fitch projections build in a large 3 ppts of GDP improvement between TY 26 and FY 29. After rising from 51% in 2025 to a peak of 56% in 2027, Fitch expects GG debt resuming a strong downward trend. The rating agency expects 1.2% GDP growth in 2025, to pick up to 2.5% in 2026 and 2026. Exports to the US account for only 2% of GDP, limiting the economy’s vulnerability to higher tariffs. Inflation in Q2 rose slightly to 2.7%, but Fitch still expects the RBNZ to cut its policy rate by a further 25bps to 3% this year. Fitch mentions external debt to remain elevated compared the median of this rating category. The current account deficit narrowed to a still high 6.1% of GDP in 2024.

• The National Bank of Poland (NBP) today published its calculations for core inflation for the month of July. Inflation net of food and energy prices amounted to 0.3% M/M and 3.3% Y/Y (from 3.4%). The measure excluding administered prices printed at 0.2% M/M and 2.7% Y/Y (from 2.5%) . The measure excluding the most volatile prices was 0.6% M/M and 3.9% Y/Y (from 4.5%). The headline figure was already released earlier at 0.3% M/M and 3.1% Y/Y. As such it returned within the NBP’s 2.5% +/- 1.% inflation tolerance band. The National Bank of Poland reduced its policy rate by 25 bps to 5% at the early July meeting. The next meeting is scheduled for September 3rd. The zloty strengthened slightly today (EUR/PLN 4.251) but recently held in a very tight sideways consolidation pattern. (EUR/PLN 4.235/4.2875).