Sunset Market Commentary

Markets

European markets took a different, more pessimistic view on yesterday’s Fed policy meeting compared to the US. They appear to have more attention to the (stagflationary) risks in the new forecasts instead of Powell’s reassuring message. European stocks dropped more than 1% with Wall Street suffering from spillover effects. But contrasting with the previous sessions, it’s US sentiment that now improved for the better. US equities quickly swapped losses for minor gains. Core bonds strengthened with Treasuries outperforming Bunds. US rates extend the post-Fed drop by declining 2.3-4.2 bps across the curve. They are off intraday lows though, helped by consensus-crushing existing home sales. Bunds had some catching up to do with Treasuries but were unable to post additional gains after gapping higher at the open. German yields ease between 1.6 and 3.7 bps against the backdrop of an important European summit on the matter of defense spending (and how to fund it), Ukraine and European competitiveness. Meanwhile several ECB members hit the wires, including president Lagarde. She stuck to the March message. Policy is “meaningfully less restrictive” and the ECB is data-dependent. Lagarde noted that elevated uncertainty (over trade) prohibits the ECB from committing to anything. Dutch governor Knot said the ECB is close to a neutral stance and is open-minded on the April decision. He cited uncertainty surround a range of sometimes opposing factors such as the impact from tariffs and the “budgetary expansion in the largest member state”. Estonia’s Muller believes tariffs pose upside risks while Portugal’s Centeno said it’s “more dubious”. USD and JPY take the lead on FX markets. EUR/USD slips to 1.083, DXY is testing 104. Sterling gains against the euro (EUR/GBP 0.835) after a slightly stronger than expected labour market report and the Bank of England’s status quo in a 8-1 vote. One member favoured a cut. Two members who voted for cuts at all three previous meetings today supported the halt, prompting a “hawkish pause” label to the decision. To hold the rate at 4.5% after February’s cut was a compromise between higher inflation and stronger-than-expected GDP growth versus “business survey indicators [that] generally continue to suggest weakness in growth and particularly in employment intentions.” Intensifying global trade policy uncertainty is obviously not helping in making a clearcut decision. So the BoE retained “a gradual and careful approach to the further withdrawal of monetary policy restraint […].” UK yields left the intraday bottoms (up to -7 bps) after the policy announcement and with a US-driven sentiment improvement now even trade flat.

News & Views

The Swedish Riksbank kept its policy rate unchanged at 2.25% and assesses that the rate will remain at this level going forward (over the policy horizon according to updated forecasts i.e. until 2028 Q1). That way, it officially puts an end to the cutting cycle that started slightly under a year ago at a policy rate of 4%. CPIF inflation has become higher than expected and is assessed to remain at between 2% and 3% for the rest of the year. The Swedish economy is in a recovery phase, but the rebound in the labour market will take a little longer. The overall growth and inflation outlook remains intact compared with December, which is obviously surrounded by a higher degree of uncertainty. The Executive Board stresses vigilance regarding contagion effects that could lead to inflation not falling back as expected. Today’s message didn’t really came as a surprise. EUR/SEK changes hands around 11.03. A reflationary-inspired euro helped avoid a break below the 11 support area earlier this month.

The Swiss National Bank lowered its key rate as expected by another 25 bps to 0.25%. The new inflation forecast has hardly changed since December. Without the rate cut, the forecast would have been lower in the medium term. It puts average annual inflation at 0.4% for 2025, 0.8% for 2026 and 0.8% for 2027, based on a 0.25% policy rate over the forecast horizon. That’s within the SNB’s 0%-2% inflation target. The SNB expects GDP growth of between 1% and 1.5% for this year and 1.5% in the next. Domestic demand is likely to benefit from rising real wages and the easing of monetary policy. Moderate economic activity abroad could dampen foreign trade. SNB President Schlegel added that today’s cut had an expansionary impact, implying a lower probability of more action down the road. The SNB will remain active in the FX market if necessary, but recently received some help from a stronger euro in battling CHF-strength. EUR/CHF trades around 0.9565 with the bottom of the broad 0.93-0.97 trading range in place since the start of last year becoming ever stronger.