Sunset Market Commentary

Markets

The latest AI disruption scare caused losses of 1.05% (S&P) to 1.65% (Dow) for major US indices yesterday evening. European risk sentiment was weak at the onset of trading but key bourses managed to flip those losses to small gains currently amid an empty eco calendar. For Chicago Fed Goolsbee (non-voter this year) it’s not obvious that Fed policy is restrictive. He sees room for more rate cuts, but that requires progress on inflation. The current 3% is not good enough. The labour market and growth don’t seem to be especially fragile. It’s the current majority thinking within the FOMC. As long as the stabilization on the labour market holds, rate cuts are only the outcome in case of goods disinflation. Even Fed board member Waller yesterday suggested that he might flip back from voting in favour of a rate cut to rate stability if the February jobs report is strong. Dallas Fed Logan over the weekend suggested that 30k monthly job gains are currently probably sufficient to keep the job market stable. Looking further, Fed Waller remains on high alert though with firms starting to shed labour after over-hiring post-Covd and with CEO’s telling him that significant job cuts are coming from AI. The US yield curve at the moment shows a very modest bear steepening with the US 2-yr and 10-yr holding above support levels at respectively 3.4% and 4%. EUR/USD is going nowhere at 1.1775. US equity benchmarks open unchanged, but AI disruption headlines hit the screens again as AI giant Anthropic launched new updates to Claude Cowork and released new plugins for workflows related to investment banking and HR. Focus for US investors shifts to this evening’s State of the Union address by President Trump (9pm ET or 3am CET). Three large software firms release earnings this week (Workday, Salesforce and Intuit) in what might also gather more attention than usual given the AI disruption scare.

The biggest moves in FX space came from Asia today. The Chinese yuan extends its strengthening run with USD/CNY trading below 6.90 for the first time since April 2023 amid the trade truce between the two nations. US President Trump is still planning to travel to China from March 31 to April 2 for a meeting with Chinese President Xi Jinping to talk on tariffs, truce, Taiwan and returning to a stable relationship. The Japanese yen suffers ground with USD/JPY one big figure higher after local media reported that PM Takaichi voiced apprehension over more rate hikes in a meeting with BoJ governor Ueda last week. EUR/GBP holds below 0.8750 resistance as BoE governor Bailey left the March rate debate open: “The question for me is have I seen enough further evidence to feel that I’m confident to take that (rate cut) step. It is a genuinely open question at the moment.”

News & Views

Business and consumer combined Czech confidence rose from 100.2 to 101.1 to remain among the highest since the last couple of years. A slight decline in consumer views was offset by rising corporate confidence (from 98.6 to 99.8), particularly in the industrial and construction sector. Trade remained unchanged while services fell a couple of points. The consumer gauge fell 0.6 points to a still-solid 107.6. The share of households expecting their financial situation to improve over the next twelve months declined and was only partially offset by a smaller share anticipating the economy to deteriorate and a fewer believing they are financially worse off than in the previous 12 months. The number of respondents who do not plan to make any major purchases in the next twelve months remained almost unchanged. The Czech crown trades little changed on the day. EUR/CZK holds steady around 24.23 and is trapped in a months-long tight sideways trading range.

The Hungarian central bank (MNB) cut the policy rate by 25 bps to 6.25%. It resumed policy normalization after having held the rate steady for almost 1.5 years. The trigger to do so were January inflation figures that brought headline CPI to 2.1% and core inflation to 2.7%. The MNB noted that the January repricing in market services, a flash point for the MNB, was at is lowest level observed in recent years. Combined with the price margin restrictions recently being extended until the end of May, the general improvement in the external cost environment and the pass-through of a stronger forint, the MNB anticipates inflation to remain below the 3% target in coming months. It repeated expectations for a sustained return to 3% by 2027H2 and added that risks to the outlook are balanced. The central bank keeps a slight hawkish edge in the statement by saying that price stability can be achieved through tight monetary conditions. It will as such continue to ensure positive real interest rates. The forint reacted stoic with EUR/HUF hovering around 379.25.