Sunset Market Commentary

Markets

Despite plenty of (geopolitical) headlines (call between Trump and Putin; debate/rumors on the structure of US reciprocal tariffs after April 2) there was no unequivocal theme to guide global markets. If anything, European and Asian risk sentiment remains constructive compared to a deteriorating sentiment on US markets. After rebounding yesterday, US equities again incur losses of up to 1.7% (Nasdaq) as investors still ponder the impact of Tariffs/Trump policy on US growth. US Treasury Secretary Bessent in an interview said he doesn’t see an indication of the US economy heading for recession. In line with comments from President Trump he rather sees the economy evolving in a transition phase from relying on government spending. US eco data published today confirmed recent trends. Hard activity data (February Industrial production +0.9% M/M, housing starts rebounding more than expected at 11.2% M/M) still suggest the US economy is doing OK. On the other hand, sentiment indicators (NY Fed services activity sentiment -19.3 from -10.5) continue to point to stagflation risks. At least for now, investors apparently tend to join the guidance from the sentiment indicators. The risk-off is dragging US yields lower after trading in green earlier in European dealings. US yields currently are trading little changed. Despite ongoing elevated uncertainty, US money markets don’t expect the Fed to profoundly change its wait-and-see assessment at tomorrow’s policy decision/press conference. The German yield curve again steepens (slightly) after yesterday’s correction with yields adding between 0.5 bp (2-y) and 2.5 bps (30-y) as the German Parliament is set to approve the loosening of the debt-break rules. Illustrating the change in investor appreciation of European markets, ZEW German expectations jumped from 26.0 to 51.6, the highest level since February 2022. The Eurostoxx 50 this afternoon also feels some negative spillovers from WS but still trades well in positive territory (+0.5%). There’s no clear trend in the core FX space. The DXY index this morning tested the recent lows near 103.22, but no sustained break occurred (yet). An early, risk-on driven rebound of EUR/USD to test the 1.095 area was also undone later in the session (currently 1.0915). At the same time, USD/JPY intraday is losing some momentum. The pair came within reach of the 150 barrier, but momentum currently is fading (149.6, yen safe have bid to resume?).

News & Views

Canadian inflation quickened way more than expected in February. Headline prices rose 1.1% m/m. The statistics agency said that “… the end of the goods and services tax (GST)/harmonized sales tax (HST) break partway through the month contributed notable upward pressure to prices for eligible products.” It resulted in yearly readings that vastly exceeded analyst estimates as well. The headline gauge sprinted from 1.9% to 2.6% (vs 2.2% expected) and core gauges accelerated from 2.7% to 2.9%. The Bank of Canada cut its policy rate to 2.75% last week. The central bank was expecting the tax changes to raise inflation but not to this extent. Today’s print already blew past the BoC’s 2.5% estimate … for March. The Canadian dollar only marginally profits though with USD/CAD hovering around 1.427. This should be seen against the backdrop of barely changed market expectations for policy easing. The BoC has put the onus on the trade war with the US. The surrounding uncertainty let alone its impact could weigh on economic growth and inflation, paving the way for further easing in April.

Jakub Seidler from the Czech central bank give his first interview since joining the monetary policy council three months ago. Seidler favours another pause at the March policy meeting (our preferred scenario), saying a cautious stance is legitimate in periods of high uncertainty due to topics ranging from tariffs over European defense spending plans to a still unfavourable structure of domestic inflation. Seidler noted that core inflation was slightly accelerating in monthly terms over the past three months. Services inflation showed a similar pattern and Seidler thinks the sector is growing more sensitive to rising salaries. Data earlier this month revealed wages growing faster than expected in 2024Q4 and are obviously not helping to sooth these concerns. Seidler says the CNB is also forced to take a closer look at items that they usually discard due to their volatile nature, such as food inflation. The recent period of double digit price rises made Czech consumers (and therefore their inflation expectations) more sensitive to it. The Czech currency reversed earlier losses to EUR/CZK 25.02 after the interview was released.