KBC Sunset Market Commentary 28/05/2025 via Trader Talent

KBC Sunset

Wednesday, May 28, 2025

Daily Market Overview

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Dear reader,
There will be no KBC Sunset on Thursday, May 29 and Friday, May 30. We resume the publication on Monday, June 2.

Markets

• After a bullish correction yesterday, bond investors at the long end of the curve kept their cool today as well. A closely watched Japanese 40-y bond auction again met with mediocre demand, but the collateral damage on the broader market was limited. After jumping higher immediately after the sale, the Japanese 40-y yield closed at 3.36% (+3.3 bps) but remains well off last week’s top near 3.70%. The focus toward the performance of the long end of the curve (and debate on fiscal sustainability) is here to stay, but last week’s tentative ‘panic’ has subsided for now. It’s a calm day for now also on European bond markets. German yields add 1- 2 bps across the curve. Inflation expectations at the ECB April consumer survey for the next 12 months rose to 3.1% from 2.9%, despite a softening in the actual measure over the previous months (2.2% EMU HICP in April, new flash reading Tuesday next week). However, markets clearly don’t see this as a reason for the ECB to backtrack on an further ‘pre-emptive’ 25 bps cut next week. With the ECB moving further into neutral territory, we are keen to see whether an uncertain (inflation) outlook also causes the ECB to shift from a proactive to a more reactive approach, as did many other central banks. Except for the Richmond Fed and Dallas Fed confidence measures, which usually are no market movers, US markets later today look out for the Minutes of the Fed’s May policy meeting, a $70bn 5-y Treasury action and Nvidia earnings. US bonds after yesterday’s rally are rising about 2 bps across the curve (2-y benchmark change). NY Fed President Williams overnight warned that policy makers should not only aim to anchor long tern consumer inflation expectations, but the whole curve to avoid that ‘highly persistent’ inflation can become ‘permanent’. On equity markets, European indices fail to build on yesterday’s strong WS close (Eurostoxx 50 -0.4%). Nvidia results after the close might decide whether there is a case to revisit the top levels reached in February. After a reversal/rebound yesterday, the dollar remains better bid as high profile negative drivers for the US currency (trade war, debt sustainability) temporary move to the background.. DXY rises from 99.53 to 99.55. USD/JPY gains modestly (144.9). EUR/USD eased from 1.133 to trade near 1.1300. Sterling fails to extend a solid performance of late. EUR/GBP still struggles to sustainably break below the 0.84 handle.

News & Views

• European consumer inflation expectations for the year ahead rose for a second month straight in April. The ECB’s consumer expectations survey showed the gauge quickening from 2.9% to 3.1%, the highest since February 2024. It’s the first time since July 2021 that inflation seen for the upcoming year was not lower than the perceived one over the last 12 months (3.1%). It’s a sign (and therefore warning signal to the ECB) of households no longer assuming disinflation. Expectations for three years ahead remained unchanged at 2.5%, similarly matching the numbers seen early last year. The longest-term measure (5 year) for a fifth time straight came in at 2.1%. European households expect nominal spending growth of 3.7% in the coming year, up from the 3.4% in March, but anticipate their income to grow slightly slower (0.9% from 1%). Economic growth expectations for the next 12 months became more negative, falling to -1.9% in April from -1.2% in March but consumers remain fairly optimistic on the labour market. They see an only slightly higher unemployment rate compared to the recent past. They are more bullish on the housing market, believing their home prices will rise 3.2%, up from 3.1% in March. Access to credit is expected to become more difficult: the net percentage assuming a tightening rose from 15.5% to 20.8%.

• Belgian inflation fell 0.16% m/m to 2.01% y/y in May. That’s down from 2.55% in April and the fourth y/y decline in a row. Core inflation (ex. unprocessed food and energy products) slowed from 2.82% to 2.59% and services CPI eased from 3.96% to 3.65%. The most significant price increases in May were registered for, amongst others, meat, private rents, hotel rooms and mobile telephone services. The top three decliners were natural gas (-6.2% m/m), electricity (-4% m/m) & plane tickets. Motor fuels fell 0.5% m/m. Inflation according to the European harmonized method (HICP) amounts to 2.8%.