KBC Sunset Market Commentary 31/01/2025 via Trader Talent

KBC Sunset

Friday, January 31, 2025

Daily Market Overview

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Markets

Markets
• Disappointing EMU Q4 growth yesterday triggered a bull steepening on EMU yield’s markets. Today, softer than expected domestic price data continued this dynamic. French HICP inflation declined 0.2% M/M, slowing the Y/Y measure from 1.9% to 1.8% (1.9% expected). German Länder data published throughout the morning also suggested a downside CPI surprise. The domestic measure indeed declined (-0.2% M/M and 2.3% Y/Y vs 2.6% expected). Core inflation excluding food and energy after the December uptick fell back to 2.9% from 3.3%. It was especially goods inflation easing (0.9%). Services inflation remained elevated (4.0%). Still, due to a different statistical set-up, the harmonized measure printed as expected (-0.2 M/M and 2.8% Y/Y, unchanged from December). Yesterday, at the post-meeting ECB press conference, Chair Lagarde indicated the bank is confident inflation will return to target, most likely resulting in an additional 25 bps cut at the March meeting. At the same, cumulative ECB easing has become substantial and policy is becoming ever less restrictive. This will trigger a debate on what is a neutral policy rate and whether the ECB should move below this level from March on. Whatever the outcome of this debate, German yields today again are ceding between 7.0 bps (2-y) and 3.0 bps (30-y). After this week’s setback, EMU money markets again embrace the scenario of the ECB lowering its policy rate to 2.0% by the end of this year. The jury is still out, but for this to happen inflation will probably will have to follow an almost perfect trajectory. US yields today again hold to the established ranges with yields change less than 1 bp aligning with the Fed’s wait-and-see stance. US December income (0.4%) and especially spending (0.7%) were solid as indicated in yesterday’s GDP report. The monthly core PCE deflator was unchanged at 2.8% Y/Y, supporting the Fed assessment that ‘inflation remains somewhat elevated’. US and EMU equities again are trading in positive territory (EuroStoxx 50 +0.3%, S&P 500 +0.5%) as solid earnings outweigh geopolitical uncertainty (the threat of tariffs in particular). In this respect, investors keep a eye on the White House, awaiting more concrete news regarding potential tariffs on Canada, Mexico and China this weekend. Brent oil trades little changed near $77 p/b.
• In line with the market reaction function of late, uncertainty on tariffs again results in by default USD strength. DXY again holds north of 108(35). EUR/USD is also ceding ground (1.037), but losses could have been more outspoken given the sharp decline in EMU yields yesterday and today. Sterling marginally outperforms the euro (EUR/GBP 0.8365) as markets look forward to next week’s BoE policy meeting. The Canadian dollar (USD/CAD 1.4530) is trading near the ‘panic levels’ briefly touched at the peak of the corona sell-off early 2020.

News & Views

• The ECB in a regular survey found that Euro area manufacturers are more worried about cheaper imports from China than tariffs from the US. Only half of the manufacturers contacted believed US levies would impact their business, with many of them noting they were already producing “local for local”. Some also said they are only exporting highly sophisticated goods which are difficult to substitute. Instead, though, they are more concerned about trade flows redirecting in case of disruptions to the US-Sino trade relationship. “In the absence of protective EU measures, this led more contacts to expect a negative effect on prices in their sector in the euro area than a positive one,” the survey reported, adding that “In the event of protective measures and retaliation leading to a more generalised tariff war, it was much more likely that costs and prices would rise.”
• UK’s Nationwide reported house prices rising marginally at the start of the new year. House prices in January inched 0.1% m/m higher compared to the 0.3% analyst estimate. The yearly print slowed from 4.7% to 4.1% as a result. Nationwide’s chief economist Gardner said the market nevertheless continues to show resilience despite ongoing affordability pressures. While there has been an improvement in affordability over the last year, they remain stretched by historic standards. Monthly mortgage payments currently equal about 36% of an average UK net income, which is well above the long-run average of 30%. House prices remain high relative to average earnings too, posing high hurdles for the initial deposit households need to cover upfront. “This is a challenge that has been made worse by the record increase in rents in recent years, which, together with the cost-of-living crisis more generally, has hampered the ability of many in the private rented sector to save.”, Gardner said.