KBC Sunset Market Commentary 22/05/2025 via Trader Talent

KBC Sunset

Thursday, May 22, 2025

Daily Market Overview

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Markets

• The flash EMU May PMI’s disappointed. After hovering just north of the 50 level that separates growth from contraction in the first four months of the year, it unexpectedly dropped from 50.4 to 49.5. As the HCOB chief economist indicated: US tariffs are not to blame. It is domestic oriented services dropping from 50.1 to 48.9. Manufacturing production (51.5) rose for the third month in a row. Germany (composite 48.6 from 50.1) joined France in contraction territory (48). S&P indicates that the rest of the euro area continues to register growth, but the pace slows. S&P sees the May reading as in line with 0.1% Q/Q EMU Q2 growth, compared to 0.3% in Q1. Orders for services still declined further. New orders in manufacturing stabilized. Despite the pause in the implementation of tariffs, business confidence also declined further after the drop in April. Services confidence dropped to lowest level since September 2022. Inflation indicators mostly slowed, but the picture wasn’t unequivocal. Services input prices still rose sharply, but the rise selling prices eased. Manufacturing input costs declined as did selling prices. With higher services inflation mainly due to high wage growth, this remains mixed input for the ECB. Even so, markets see current mix as justifying the ECB to proceed with a next ‘pre-emptive’ 25 bps rate cut in June (95% discounted). Short-term Germany yields stay lower in a daily perspective (2-y -4.5 bps), but long term yields turned back north with the 30-y again adding 2.5 bps. Investors in LT bonds globally are still keeping a close eye at the developments in the US. In this respect, the US House (narrowly) approved President Trump’s tax Bill, which will now go to the Senate. Even as amendments are likely, the outcome will sharply further raise US deficits and the path of government debt. LT US yields again jumped higher after the approval. The 30-y touched 5.15%, but the pressure gradually eased somewhat. US yields currently are changing between -4.0 bps (2-y) and +2.0 bps (30-y). Fed Waller kept the door open Fed rate cuts in H2 if the tariffs on US trading partners would settle around 10%. A higher level could complicate the Fed assessment. At the time of finishing this report, the US PMI’s surprise sharply to the upside (composite 52.3 from 50.2), helping to put an intraday bottom yields.
• Yesterday evening, US fiscal uncertainty and a poor US 20-y auction already triggered a correction in US equities. This spilled over to Asia an Europa. EMU PMI’s didn’t help European markets negative guidance from the US. The EuroStoxx 50 currently cedes about 1.0%. US futures reversed initial further losses after the approval of the tax bill. The S&P opens little changed. On FX markets, the dollar shows a mixed picture. The US currency eased further against the likes of the yen, but gradually found a bottom, supported by the US PMI’s (USD/JPY 143.8). Poor EMU PMI’s pushed EUR/USD back below 1.13, but the damage stays modest for now. Sterling slightly outperforms the euro (EUR/GBP 0.8420). UK PMI’s were not impressive, but better than EMU. (composite 49.4, from 48.5, services back at 50.2). Even so, the UK 30-y yield adding another 6 bps (5.55-60 area 6%) remains another warning sign.

News & Views

• The Turkish central bank (CBRT) kept its EoY inflation forecasts unchanged for 2025 and 2026 in its second (out of four in total) inflation reports this year. The respective 24% and 12% projections are on the optimistic side given that actual CPI was 38% in April with the disinflationary process showing signs of stalling in recent months. CBRT governor Karahan cited easing commodity prices and domestic activity to keep forecasts stable. Annual average oil prices were lowered by 14% and 18% for 2025 and 2026 respectively compared to the Q1 inflation report while growth was revised down. But he did warn for upside risks. The arrest of president Erdogan’s political rival in March wreaked havoc on Turkish markets, including on the local currency. While Karahan expects the inflationary impact of to be temporary, they remain on the lookout for pass-through effects. Either way, by keeping the inflation forecasts well above the 5% target and coupled with Karahan’s pledge to do “whatever is needed” to tame price pressures, the central bank signals any future rate cuts would only be gradually. The CBRT started easing late last year but changed course after the March shocker. The de facto policy rate currently stands at 49%.
• The oil price rally yesterday following CNN reports of Israel preparing an attack on Iranian nuclear facilities was very short-lived. It reversed course already during the day and extends losses today. The latter followed a Bloomberg report suggesting OPEC+ is readying another jumbo (+411k barrels) output hike in July. That would be the third such move in a row and another strong deviation from the much more gradual return of output OPEC had agreed on initially. Brent oil drops to $63.75.