Sunset Market Commentary

Markets

Higher-than-expected European inflation numbers and more rumours on fast and huge fiscal spending in Europe weighed on European bonds with curves bear steepening. February inflation rose by 0.5% M/M (vs 0.4% consensus) with the annual number moderating from 2.5% to 2.4% instead of the hoped-for 2.3%. Core CPI picked up to 0.6% M/M and 2.6% Y/Y (from 2.7%). Inflation numbers strengthen the case for an April pause in the ECB’s cutting cycle. On the spending front, a defense package is expected to be announced on Thursday while whisper numbers on German efforts, bypassing the next parliament before it convenes a first time end March, reach as far as €1tn. This weekend’s developments with the collapsed Trump-Zelensky deal and the emergency summit in London accelerated the defense need with a willingness to freeze budget discipline. German yields add 6.4 bps (2-yr) to 11.2 bps (30-yr) in a daily perspective. The euro catches a bid against the dollar with the pair changing hands at 1.0485 form a start at 1.0371. European stock indices gain 1.5% on average with the German Dax (+3%) outperforming. US equities underperform, opening with modest gains (+0.25%).The US eco calendar included a significant upward revision to the February manufacturing PMI (52.7 from 51.6) and a near consensus headline manufacturing ISM (50.3 from 50.9 vs 50.7 expected). Details were weak though (stagflation!) with new orders (48.6 from 55.1) and employment (47.6 from 50.3) dropping below the 50-mark while price pressures intensify (62.4 from 54.9). US Treasuries gain ground in a first response with US yield changes posting minor losses in a daily perspective.

The Kingdom of Belgium announced its intention to issue a new OLO (104) via syndication in the near future, likely tomorrow. They are looking at a long 15-yr OLO, maturing in June2042. A third (and final?) syndication later this year is expected to have a shorter, 5y maturity (Jun2030). That way, the Kingdom breaks with its recent “tradition” of exploring the very long end of the Belgian curve. It’s been since 2018 that a new 15-yr deal was the one with longest maturity while the 30-yr was the preferred segment in the recent past (2022-2024). The debt agency so far raised €11.39bn via another syndication (€7bn Jun2035), a regular OLO auction (€3.88bn) and through the ORI facility (€0.51bn). That’s slightly over 27% of this year’s estimated €42bn OLO funding need to cover the lion share of the €44.65bn gross borrowing requirement.

News & Views

The Czech manufacturing PMI rebounded more than expected in February, from 46.6 to 47.7 (vs 47.1 consensus). The decline (<50 levels) is the slowest pace since June 2022. Contractions in output and new orders eased, but employment fell at a sharper pace. Demand weakness especially comes from export markets and the construction sector. Business confidence (12-month ahead) picked up to the strongest level since March 2024. Input costs increased at a quicker, but still historically soft, rate in February. Muted cost pressures enabled firms to discount their goods again, as selling prices fell marginally. The Hungarian manufacturing PMI rose from an upwardly revised 50 to 51 in February, the highest level since May 2024, mainly driven by increases in new orders and in output. Purchased inventories saw a notable gain as well, boding well for the future. Employment remains in contraction territory while prices indices were mixed with the import price index dropping and the export price index modestly improving. Both the Czech koruna and the Hungarian forint outperform the euro today, but that’s more linked to general positive risk climate, especially related to the crucial (for CE) car sector. EUR/CZK and EUR/HUF are closing in on support levels at respectively 25 and 400.

EC President von der Leyen highlighted three priorities after a second meeting of the Strategic Dialogue on the Future of the European Automotive Industry. The first one is innovation with a focus on advancing software and hardware for autonomous driving. A second in clean mobility with a need for flexibility on CO2 targets. A proposed amendment to the CO2 Standards Regulation will allow companies three years to meet targets instead of annual compliance, providing more breathing space without changing the targets. Finally there’s competitiveness with a crucial role for strengthening European car supply chains, particularly for batteries. Direct support for EU battery producers will be explored and regulatory simplification will continue. An action plan will be presented on Wednesday with another meeting planned before the summer break.