Sunset Market Commentary

Markets

The ECB lowered the key policy rate by 25 bps to 2.75%. The fifth reduction was unanimous, widely expected and came with some minor tweaks to the statement. While inflation is converging to the 2% target, the ECB scratched the notion that domestic inflation is edging lower. Instead it now only states that it remains high, mostly due to strong (but moderating) wage growth. Just as the Riksbank and Bank of Canada earlier this week, the ECB highlights how its recent rate cuts are now gradually filtering through. Lagarde during the presser explicitly mentioned the cumulative amount (125 bps), leaving a short moment of silence afterwards. This can be seen an early indication that back-to-back cuts make room for a more cautious easing pace. Gradually fading effects of restrictive monetary policy along with rising real incomes continues to underpin hopes for a demand-led recovery. Growth risks remain tilted to the downside. Among the risk factors, president Lagarde mentioned greater friction in global trade. The introductory statement does not say what such a scenario would mean for inflation though, only that it makes the outlook more uncertain. When asked, Lagarde, just as Powell yesterday, said it is too early to draw any conclusions from what has been announced (by the Trump administration) so far. The central bank still sticks to a data-dependent and meeting-by-meeting approach without pre-coming to a particular rate path. The first question from the audience was nevertheless about the way forward, referring amongst others to Board Member Schnabel who said the ECB is now nearing the neutral rate. Lagarde deflected by referring to the March meeting as one with updated forecasts that will substantiate the decision then without looking beyond that. She did flag an upcoming staff publication, Feb 7, on the revision of the natural interest rate. The timing, ahead of the March 6 meeting when another rate cut brings the deposit rate to the upper bound of the/Schnabel’s neutral rate estimates, is not a coincidence. Euro area yields slip 7/9 bps today but that’s mostly the result of disappointing GDP numbers in France and Germany. The euro tried to gain against the dollar (1.042) but the move lacked traction. Strong US GDP figures (2.3% Q/Qa) also muddied the market reaction. A strong consumer performance (4.2% Q/Q, from Q3’s 3.7%) made up for the growth deceleration compared to Q3 or the slight expectations miss (2.6%). It alone carried the US economy in Q4, contributing 2.8% to the print. Inventory depletion (-0.93 ppts) was the main drag. Net exports were flat while the government contributed 0.4 ppts. Combined with low weekly jobless claims it showcases ongoing strength of world’s number 1 economy. The headline price deflator picked up from 1.9% to 2.2% over Q4, less than the 2.5% expected. The core gauge matched the 2.5% estimate (from 2.2%). US yields ease less than 2 bps.

News & Views

The Belgian Statistical Office (Statbel) today reported that inflation in the country accelerated to 1.39% M/M and 4.08% (0.4% and 3.16% in December). The biggest contributions came from electricity, domestic services, milk products and natural gas. Prices for mobile telephony, hotel rooms and travels decreased. Core inflation accelerated to 3.14%Y/Y from 2.91%. Energy inflation (15.89% Y/Y from 7.4%) was an important driver of upward headline price pressures. Compared to last month, natural gas prices increased by 2.7% and those for electricity by 8.8%. The high recent (energy) inflation is due base effects. This will continue to have an upward impact on inflation up to February 2025. Inflation for services increased to 4.13% from 3.94%. Inflation for rents has decreased to 3.41% from 4.22%. Food inflation now stands at 2.54% compared to 1.85% last month. The first inflation estimate according to the European harmonised index of consumer prices (HICP flash estimate) for Belgium amounts to 4.4% in January 2025.

Hungarian GDP rebounded 0.5% Q/Q in Q4 compared to the previous quarter. This means that the economy left a technical recession after negative figures in Q3 (-0.6% Q/Q) and Q2 (-0.2%). Activity in Q4 last year was 0.2% higher Y/Y. For the whole of 2024, activity growth was a very modest 0.6% Y/Y. Statistics Poland also released a preliminary estimate of 2024 growth. Activity in the country last year increased 2.9% compared to the whole of 2024. Total consumption expenditure increased by 4.0% compared with the previous year, with household consumption increasing 3.1%. Gross fixed capital formation rose by 1.3%. Looking at gross value added, the economy grew 2.1% in 2024. Gross value added in the industry increased 1.0%. Valued added in construction decreased by 6.7% and increased in trade and repair (2.3%).