KBC Sunset Market Commentary 24/01/2025 via Trader Talent

KBC Sunset

Friday, January 24, 2025

Daily Market Overview

Click here to read the PDF-version of this report

Markets

• Eurozone business activity returned to growth in January according to flash EMU PMI’s. The composite gauge ticked up from 49.6 from 50.2 (vs 49.7 expected). It’s only the first 50+ reading since August of last year. The rate of expansion was only marginal amid ongoing demand weakness and it was centered solely on services. The services PMI was broadly flat at 51.4 with that PMI over the past year being only below the 50 boom-bust mark in November 2024. The manufacturing PMI improved from 45.1 from 46.1, the least worse level since May of last year. There were overall signs of improvement with business activity in Germany stabilising, ending a six-month sequence of decline. France remained in contraction, but the pace of reduction eased to the weakest since last September. The rest of the EMU continued to outperform, seeing a further modest expansion of output, the thirteenth increase in a row. Details showed new orders decreasing, but at the smallest degree since August while international export orders are still in dire straits. Signs of improvement in activity led to a near-stabilisation of employment. The fastest increase in workforce numbers in the service sector for six months was almost sufficient to cancel out a marked reduction in manufacturing employment. Meanwhile, input costs rose sharply, with the rate of inflation hitting a 21- month high. In turn, companies also increased their selling prices at a sharper pace. Ahead of next week’s ECB meeting, the latter isn’t encouraging in light of the ongoing rate cut cycle. Finally, companies remained optimistic that output will increase over the coming year. European bonds sold off after PMI’s with the curve bear flattening. EU swap rates rose by 5.5 bps (2-yr) to 2.3 bps (30-yr). EUR/USD temporarily pushed from 1.0450 to beyond 1.05, but failed to cling to those levels. The overnight move from 1.04 to 1.0450 was triggered by USD-weakness after US President Trump threatened Fed chair Powell a first time into lowering rates. European stock markets extend their bullish run.

News & Views

• UK January PMIs pointed “to a stagflationary environment which poses a growing policy quandary for the Bank of England”, S&P Global’s chief economist said in a sobering comment. While having improved on face value – the composite PMI picked up from 50.4 to 50.9 – it was only slightly above the 50 no-change level and well below the series long-run average of 53.6. The marginal improvement came on the account of a smaller contraction in the manufacturing industry (48.2 vs 47), in turn the result of output still declining but at a markedly slower pace since December. Services stabilized at 51.2. Orders books shrank for the fourth month in manufacturing and for the first time in 15 months in the services sector. The latter also outpaced manufacturing in shedding jobs. Companies blamed the forthcoming hike in employer’s National Insurance as well as the impact of a post-Budget slump in business confidence as reasons for staff cutbacks. Businesses reported a sharp and accelerated increase in overall cost burdens at the fastest rate in 1.5 years amid higher salary payments, energy costs and priced paid for imported raw materials. Prices charged to end-consumers rose the quickest since July 2023. Activity expectations weakened for a sixth month straight to the lowest since December 2022, posing downside economic reasons. Reasons stretched from unfavourable UK economic prospects, higher employment costs and a Budget-related tumble in investment spending plans. UK money markets pared their Bank of England easing bets after today’s PMIs. That’s offering the pound a lifeline against the likes of the euro. EUR/GBP trades unchanged around 0.843.
• German newspaper Handelsblatt citing officials reported the government has lowered its 2025 forecast from 1.1% to just 0.3% amid signs of the economy showing little signs of recovering. Three leading German economic forecasters already projected growth rates between zero and 0.4% back in December. Europe’s largest economy shrank by 0.2% last year, posting a second straight yearly decline. The economy has shown up being the top concern of voters ahead of a national election on February 2023. The CDU/CSU is still having a comfortable but declining lead over other parties. It recently slipped below the 30% threshold with voters switching to the far-right AfD (22%) instead. Former government coalition parties SPD (socialists) and the Greens fluctuate around >15% and +/- 13% respectively. The liberals, whose opposition to break up the debt ceiling triggered the government collapse, flirt with 5%.