In focus today
In the euro area, focus turns to the inflation data for February. As hinted by the national releases (see our what happened over the weekend section), we forecast euro area headline inflation to decline to 2.3% y/y from 2.5% y/y. Most importantly, underlying inflation continued to ease in all countries, with muted monthly price increases and a decline in the yearly growth rates. Services inflation is finally starting to decline due to base effects and lower momentum, and we thus expect euro area core inflation to fall to 2.4 % y/y from 2.7% y/y. We also look out for the final release of the manufacturing PMI for February, which rose more than expected to 47.3 in the flash print.
In the US, focus turns to the ISM Manufacturing index for February released at 16.00 CET. Consensus points to a modest downtick to 50.5 from 50.9 in January. This is in contrast to the flash S&P Manufacturing PMI, which showed an improvement in February. Note that the final release of the S&P-measure will be released at 15:45.
In Sweden, PMI for the manufacturing sector has been in solid territory over the past year with an average of 52.0, and the last print for January was 52.9. While our base case is for a number around that level, we look for any impact of recent jitters around tariffs and the increasing geopolitical tensions. Given the rather weak state of the labour market, we will also look more closely at how the employment sub-index evolved. We will also get the Riksbank Business Survey, which will be an important input for the board ahead of the upcoming March meeting and has been highlighted by Aino Bunge as especially important.
The focus this week will most likely be on geopolitical news – in particular any progress in the Russia-Ukraine peace talks and whether the Trump administration’s tariffs imposed on Mexico, Canada and China will be implemented Tuesday. Furthermore, the ECB will convene on Thursday, where we expect them to cut rates by 25bp, while the week is concluded with the US February Jobs Report scheduled for release on Friday.
Economic and market news
What happened over the weekend
In the US, Core PCE was close to expectations at +0.3% m/m (SA), while core services inflation moderated. While this is not exactly a surprise, it is still positive for the Fed to see that the upside surprise in CPI was not repeated in PCE data.
And while spending data for January is subject to residual seasonality, at first glance it is noteworthy that savings rate ticks quite sharply higher to 4.6% (from 3.5%). This causes real household spending volume to decline by 0.5% m/m (SA). It will be interesting to see if weaker consumer sentiment in February translates into further cautiousness in spending.
In the euro area, there were several inflation releases on Friday. German CPI inflation was unchanged at 2.3% y/y in February (consensus 2.3% y/y), but higher than indicated by regional data. In France, HICP inflation fell to 0.9% y/y from 1.8% y/y (consensus 1.1% y/y). Italian HICP rose 1.7% y/y, which was below expectations of a rise to 1.8% y/y (prior 1.7%). Hence, Italian inflation also came in lower like France and Germany.
In Norway, NAV registered labour market report showed an unemployment rate of 2.0% (SA) which is slightly below Norges Bank’s forecast of 2.1%. The number of full-time employees fell by 327 people s.a. in February which is clearly considerably better than what other indicators would suggest. Retail sales showed a monthly rise of 1.1% m/m which paints a picture of a slight pick-up in goods consumption towards the end of last year and the beginning of 2025.
The Norges Bank’s Q1 expectations survey showed that price and wage expectations are on the decline. Thus, the range for expected wage growth in 2025 is in the range 3.9-4.2%, compared with Norges Bank’s estimate of 4.2% from the December monetary policy report.
In Sweden, GDP numbers came in better than expected at 0.8% q/q and 2.4% y/y. The domestic economy also performed better than expected, and consumption ticked up by 0.7% q/q. Thus, we expect consumption to show a more modest increase in Q1 than in Q4.
In China, manufacturing and non-manufacturing activities showed growth in February, with the PMI (NBS) rising to 50.2 and 50.4 respectively, suggesting improved domestic demand. Composite PMI increased to 51.1 in February. Like NBS, Caixin manufacturing PMI increased to 50.8 from 50.3.
Turning to politics, China plans to counter the upcoming US tariffs by targeting American agricultural exports, according to China’s state-backed Global Times. The US agricultural sector, with China as its largest market, has historically been prone to being leveraged during trade conflicts.
On the geopolitical front, the UK and France announced they would lead the so-called Coalition of the Willing and work on a ceasefire proposal for Ukraine after the emergency meeting convened by the UK Prime Minister Starmer in London yesterday. They emphasize that for any peace deal to be sustainable, the US needs to be involved and say that signing of the minerals deal is a key priority next. Late in the evening, French PM Macron also proposed a partial one-month ceasefire that would not cover ground fighting. This morning we published a piece about the most recent talks in the Russia-Ukraine war, see Research Global: Arming Ukraine is the cheap option for Europe, 3 March. After the heated Trump-Zelensky exchange in the Oval Office on Friday, it is ever more clear that Europe urgently needs a plan to ensure undisrupted support for Ukraine. We argue that arming Ukraine is by far the cheapest option for Europe, even if it requires that Europe would cover the costs on behalf of the US. We also think the easiest way forward is to work with the so-called Coalition of the Willing instead of pursuing a unanimous EU-wide decision on the matter of confiscating the frozen Russian assets.
In the Middle East, the ceasefire between Hamas and Israel lapsed on Sunday morning after Hamas rejected an updated proposal by Israel regarding the extension of the ceasefire under phase two. As a result, Israeli PM Netanyahu announced that all aid deliveries to Gaza would stop.
Equities: Equities rose on Friday as US markets rallied, closing at their highest point after a late surge in trading. However, this does not alter the fact that equities were lower over the week on a global scale, led by declines in the US and within the tech growth sector. It is also worth remembering that Japan and other Asian markets experienced sharp declines on Friday morning.
Before jumping to conclusions, it is essential to thoroughly review the performance of cross-equities and cross-asset classes. One notable observation is that European equities rose last week, driven by banks, which saw gains of more than 4%. Thus, the initial conclusion is that we are not witnessing a global growth scare. Also, value stocks outperformed growth stocks by 3% last week, which does not align with the message from the bond market, where yields continued to fall, including on Friday.
It is tempting to point to a growth scare in the bond market, drawing parallels to previous episodes. However, the still relatively new US administration plays a significant role here. Again, look at Europe, where the 10-year yield is down “only” 25 basis points from its peak in January compared to the US, where the decline is about 60 basis points. Hence, we are not really seeing a global growth scare.
A final noteworthy observation is the performance of assets such as Bitcoin and Tesla, which surged right after the election but are currently under pressure. This indicates that we are not dealing with a classic growth scare sell-off but rather a policy fear and uncertainty-driven readjustment. US equities on Friday: Dow +1.4%, S&P 500 +1.6%, Nasdaq +1.6%, and Russell 2000 +1.1%. Markets in Asia are playing catch-up this morning despite the looming tariff deadline tomorrow. European futures are also reflecting the strong late-hour performance in the US on Friday, rising by half a percent this morning. US futures are green as well, although not rising as strongly as in Europe.
FI: The decline in US yields continued through Friday’s session as US consumer spending weakened significantly in January. The bulk of the move came from the front end of the curve with the 2Y US Treasury yield breaking below the 4% mark. In Europe, rates were relatively flat throughout the session despite a new batch of soft figures on core inflation from Germany and France. The recent string of soft US data has lowered the implied terminal Fed Funds rate from 4% by mid-February to 3.50% as of today. We think the downward correction can proceed a bit longer, as we target a terminal rate of 3-3.25%. However, the rapid repricing seen recently has left US yields more sensitive in the near term to upside data surprises (e.g. on this Friday’s NFP) and the ongoing process of delivering an expansionary tax reform.
FX: EUR/USD dropped below 1.04 after Trump’s tariff tweet last Thursday, which triggered a typical risk-off reaction and a broadly stronger USD – its first weekly gain in a month, also supported by general risk off sentiment. CEE currencies ended the US-session on Friday on a weak footing after Zelensky’s visit to the White House took a turn for the worse, halting further immediate progress between the two nations. Closer to home, the market continued to press EUR/DKK FX forwards higher on Friday in anticipation of tighter liquidity conditions at the end of March.
