Negotiations Continue in Germany as the Green Party Voices Distrust

In focus today

Today, we will receive inflation figures for Germany, France, and Spain. These country-specific data serve as valuable indicators for next week’s euro area inflation, offering insights into the potential direction of overall inflation trends in the euro area.

In Sweden, focus is on the February LFS. Last month, seasonally adjusted unemployment shot up to a seldom seen 9.7% due to a sharp influx of discouraged workers from the non-labour force to the labour force. As they did not get any jobs on the aggregate, the unemployment rate soared. For February, we expect at least some reversal of this and expect the unemployment rate back down at 9.2%.

Economic and market news

What happened overnight

In Ukraine/Russia, Putin addressed the US backed 30-day ceasefire, expressing support for the concept but requesting several clarifications and conditions. Putin emphasised that many essential details aimed at “solving the root causes” needed to be resolved, suggesting that a swift end to the war was unlikely.

In the US, a top Senate democrat stated support of the Republican bill to prevent a government shutdown, cautioning that failing to pass the measure, scheduled for early Saturday could pave the way for a Trump power grab.

What happened yesterday

In the euro area, industrial production exceeded expectations in January, increasing by 0.8% m/m (cons: 0.6%, prior: -0.4%). However, the less volatile 3M/3M measure indicated that production from November 2024 to January 2025 was still 0.25% below the preceding three months. While hard data is beginning to show signs of stabilisation in the industry following a declining trend, it is still too early to conclude that this trend has ended, as manufacturing PMIs remain below 50.

In Germany, Berlin’s fiscal debate offered limited reassurance on securing The Green party’s backing for the bill. Merz commended the constructive work with The Greens but faced challenges regarding climate protection. The Green’s co-leader expressed distrust, resulting in a pause in negotiations. The bill’s passage on Tuesday remains uncertain, further complicated by last-minute lawsuits, which are expected to be dismissed, allowing the “old” parliament to operate until 25 February. The final vote is scheduled for Tuesday, 18 March with negotiations expected to extend into the weekend in pursuit of an agreement.

In the US, February’s PPI fell slightly below expectations at the headline level, though excluding volatile components revealed stable price pressures. PPI rose 3.2% y/y (Jan: 3.7%), with services prices pressures easing, as core goods prices showed modest increases, mirroring similar trends seen in the CPI. Meanwhile, both initial and continuing jobless claims saw slight declines, suggesting that labour market conditions remain steady despite concerns over federal layoffs.

In Sweden, the final inflation figures for February matched the preliminary data, showing that inflation was significantly higher than expected, with CPIF ex Energy reaching 3.0% y/y. The final details revealed that the unexpected rise seen in last week’s preliminary data was primarily due to increases in food and recreation prices.

Equities: And… we are in correction. Equities substantially lower yesterday after what looked like a dead cat bounce the last two sessions. S&P 500 sold off -1.4% hitting correction territory, while Russell 2000 did no better -1.7% and Nasdaq -2%, on track for the fourth straight weekly drop. Sector performance reversed again, this time to the benefit of defensives but sectors were all over the place. MAG7 led the declines together with defensive real estate, while cyclical materials and financials were relative outperformers with utilities. We interpret this as markets making it clear that it is not economic growth that is yet driving the selloff but uncertainty with valuation in focus rather than earnings. US futures are substantially higher this morning so in the absence of new tariff threats, we might see a little bounce today.

FI&FX: Weak risk sentiment drove equities and US Treasury yields lower as markets worry about an escalating trade war. It has been a volatile week in the financial markets, where 10Y Bunds almost reached 2.95% during the week but have declined and are trading around 2.85%. 10Y US Treasuries have also been trading in a wide range between 4.15% and 4.35% and are currently at 4.26%. EUR/USD moved lower yesterday with the weaker risk sentiment, and the February-to-date USD/SEK rally has paused over the last sessions. After edging just below the 10.00 mark on Tuesday, it now trades at 10.20.