KBC Sunset Market Commentary 22/04/2025 via Trader Talent

KBC Sunset

Tuesday, April 22, 2025

Daily Market Overview

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Markets

• While European markets were closed for the Easter weekend on Friday and yesterday, US investors had to cope with an additional layer of uncertainty as the Trump administration is putting pressure on the Fed to cut rates more and sooner than they currently (communicate) are considering. Even Fed independence is again becoming a genuine source of debate. Yesterday this triggered an additional leg in the ‘sell US trade’, with US equities, the dollar and LT US Treasuries all facing strong headwinds. However, some calm returned today, or at least the pressure didn’t intensify. Probably awaiting other social media comments from the US president. In technical trading, US yields currently are changing between + 2 bps (2-y) and -4 bps (30-y). We don’t draw any firm conclusions from today’s price action yet. Even so, both at the short end of the curve (almost 3.5% Fed fund rate eoy) and at the long end of the curve (US 30-y 4.90%) quite some good/bad news should already be discounted by now, unless you take into account an extreme scenario. Whatever the consideration, markets didn’t feel the need to push further after yesterday’s US sell-off. US equities are rebounding about 1% at the open. The EuroStoxx 50 also shows some resilience (-0.25%) given yesterday’s WS sell-off. US equity investors for several reasons will take a close look at the Tesla results to be announced after the close of cash trading in the US later today. At the reopening of European markets post-Easter, a mild safe haven bid still supports German Bunds with yields declining between 1.5 bps (2-y) and 3.2 bps (30-y). Even if you assume some deflationary impact from the global context on Europe (negative demand shock, stronger euro, lower energy prices…), European money market have gone (very) far in anticipating the ECB ability/necessity to support growth later this year/early next year (low of the ECB cycle potentially near 1.5%). The pause in the ‘sell US trade’ for now also prevents further USD losses. DXY is gaining modestly to 98.55, but still holds below the key previous support area of 98.97 (62% retracement)/99.57. EUR/USD corrects off the 1.15+ area (currently 1.1463). At USD/JPY 140.6, the yen again outperforms (especially the against the euro). Comments from people familiar with the internal debate with the Bank of Japan this morning indicated that the BoJ currently isn’t at a point yet to profoundly change its stance of gradually raising rates further. A relative mild risk sentiment also gave some relief for sterling. EUR/GBP eased from the 0.86 area to currently trade near 0.8575. Headlines from (hawkish) BoE member Greene, did catch the eye as she assessed that US tariffs represent more of a disinflationary than an inflationary risk, suggesting more room for the BoE to take a more growth supportive stance.

News & Views

• The ECB published its Q2 Survey of Professional Forecasters. Respondents’ expectations for headline inflation were 2.2% for 2025 (from 2.1%) and 2% for 2026 (from 1.9%) and 2027 (from 2%).Core inflation expectations were also 0.1 ppt higher at 2.3%-2.1%-2.1% for the 2025-2027 period and for the longer term (2% from 1.9%). Respondents expected real GDP growth of 0.9% in 2025 (from 1% in the Q1 survey), 1.2% in 2026 (from 1.3%) and 1.4% in 2027 (from 1.3%). The expected trajectory of the unemployment rate was revised slightly downwards. The unemployment rate is expected to average 6.3% from 2025 to 2027, and then to fall to 6.2% in the longer term. The Q2 SPF was conducted between 1 and 4 April 2025, when US President Trump announced reciprocal tariffs.
• The IMF updated its World Economic Outlook. Major policy shifts are resetting the global trade system and giving rise to uncertainty that is once again testing the resilience of the global economy. These developments come against an already-cooling economic momentum. The IMF warns for diminished policy space to support economies in case of new negative shocks or a pronounced downturn. Fiscal space is much tighter after stimulus in the wake of the pandemic and the energy crisis with rising debt services costs hindering the already historic fiscal adjustment necessary to stabilize debt ratios. There is also little leeway for central banks to look through new negative supply shocks with inflation expectations exceeding central bank targets in most advanced economies. To try to captures the huge amount of uncertainty, the WEO today released three different scenarios. The reference forecast is based on measures announced as of April 4 (peak tariffs) and projects growth to fall from 3.3% in 2024 to 2.8% (from 3.8% in January update) this year before recovering to 3% in 2026 (from 3.3%). For the US, the IMF plots 1.8% for this year and 1.7% for next. For EMU it’s 0.8% and 1.2%.