KBC Sunset Market Commentary 30/07/2025 via Trader Talent

KBC Sunset

Wednesday, July 30, 2025

Daily Market Overview

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Markets

• We’ve been treated with a slew of GDP numbers today. Europe kicked off yesterday with Belgium (0.2% q/q) and a stronger-than-expected outcome for Spain (+0.7% q/q). Both also released the first inflation numbers for July (HICP: 2.6%, down from 2.9% and 2.7%, up from 2.3% respectively). French this morning topped estimates as well with a 0.3% print, be it almost exclusively on the account of inventory building. Italy (-0.1%) disappointed while the German economy contracted the expected 0.1% but with a downward revision to Q1. The euro area as a whole unexpectedly expanded by 0.1% (thanks to French and Spanish beat). That’s nothing to brag about but with some kind of a trade agreement finally in place that’s reducing the uncertainty to a certain extent, hope is that it gets better from here on out. Euro rates shrugged and the common currency drifted further south against the dollar, extending this week’s downleg. This also followed a stronger-than-expected ADP job report of 104k vs 76k expected. Next up was US Q2 GDP. Annualized quarterly growth came in at 3%, recovering from Q1’s -0.5% and topping the 2.5% estimates. Details show the expected reversal of import flows from the pre-tariff frontloading phase in Q1. Net exports as a result supported the headline outcome with by 5 ppts. This was only partially offset by inventory reduction (-3.17 ppts). This process (ie destocking the cheaper pre-tariff products) by the way helps explain why inflation numbers do not show the full impact of Trump’s tariffs just yet. The remainder of growth came from consumer spending, adding around 1 ppt to quarterly annualized growth. Both fixed investment and government consumption were marginal (+0.08 ppts). Published with the GDP numbers were the Q2 PCE price indices. They showed a sub-consensus 2% (from 3.8% in Q1) for headline PCE but the core gauge was a higher than anticipated 2.5% (from 3.5% in Q1). The combined releases trigger further dollar strength and UST underperformance vs Bunds. EUR/USD is nearing the 1.1431 support (23.6% retracement on the 2025 rally) and US rates are adding 4.4-5.4 bps across the curve.
• Following the data deluge, the Fed policy meeting tonight is now at the center of attention. Powell is bound to leave rates unchanged at 4.25-4.5%, despite calls from Waller (and to a lesser extent Bowman). Markets are particularly on the lookout for any hint regarding future easing now some (though definitely not all) of the tariff fog is ebbing away. The Fed chair did subtly change his tone before Congress, saying rates could be cut sooner rather than later if tariff inflation remains limited and/or the labour market deteriorates. The former is still unclear. The most recent CPI has shown signs of higher tariff-induced prices kicking in but they were marginal. They have of course potential to intensify in coming months. The labour market meanwhile is holding up well. Against the backdrop of talks with another major trading partner, China, still ongoing (and probably to be extended) and apparently a more than resilient economy, we assume Powell to stick to a wait-and-see approach. Money markets price in a 65% chance for a cut in September, meaning that in the event of concrete guidance for near-term rate reductions, we will see downward pressure on both US rates and the dollar.

News & Views

• Czech GDP continued to grow by +0.2% q/q and 2.4% y/y in the second quarter of this year. The result is close to KBC Economics’ estimate and not far from the Czech National Bank's latest staff forecast (2.3% YoY). Quarterly dynamics slowed compared to previous quarters (from 0.8% and 0.7%). There’s no detailed breakdown of GDP yet, but the statistical office noted that foreign trade and industry contributed negatively to quarterly growth, while everything else contributed positively (on the demand side, especially consumption). At this point, KBC economics has no reason to change our relatively conservative outlook for the economy (2.1% for 2025 and 1.8% for 2026). The CNB meets next week and comes with updated staff forecasts. The Czech crown trades higher on the day with EUR/CZK moving to 24.57 and closing in on the YtD (and 2024) highs.
• The Hungarian economy accelerated with the Q2 number printing a better than expected 0.4%. This comes after a upwardly revised -0.1% in Q1. Services (particularly ICT) carried growth last quarter. The year-on-year figure remains mired to near-zero levels, though, highlighting the ongoing struggles. The Hungarian forint nevertheless trades higher on the day, pushing EUR/HUF back below 400. Investors were bracing for a (much) weaker outcome after economy minister Nagy’s dire comments yesterday.