In focus today
In the euro area, we receive final services PMI. The flash estimates fell to the lowest level in three months, to 50.7 and undercutting market expectations of 51.5. The market expectation is that final numbers will align with flash estimates on 50.7.
In the US, a string of data will be released this afternoon. The ADP employment report will provide an early indication on what to expect in relation to this Friday’s BLS Jobs Report for February. However, it is important to note that the ADP data has historically been an unreliable leading indicator for the official NFP figures. The afternoon also features the February ISM Services data, which will be especially interesting this time given the very weak preliminary PMI Services numbers for February and the significant worsening of household sentiment seen recently.
In Sweden, service PMI is released. This has been hovering close to the 50-mark since 2023 with the latest print at 50.1. Looking at the subcomponents, delivery times contributed about 1 unit on the upside, while the employment index dragged it down by almost the same magnitude. So, while we overall expect another print around 50, we will examine the subcomponents for more insight on the state of the services sector.
Economic and market news
What happened overnight
In China, growth targets and other key goals for 2025 were revealed at the annual National People’s Congress. The growth target was set at ‘around 5%’, consistent with last year and expectations, reflecting China’s aim to maintain stimulus against higher US tariffs. China increased the budget deficit target from 3% to 4%, the highest in many years, and stated that they would adopt a more proactive fiscal policy. That boosting private consumption is priority number one was highlighted again while technology advancement is number 2. While there were few surprises, markets responded positively to the clear message of continued stimulus to reach a quite ambitious growth target of 5% (cons: 4.5%, we expect 4.7%).
What happened yesterday
In the euro area, the unemployment rate remained at record-low 6.2% in January as the number of unemployed persons fell by 40 thousand. Hence, the labour market remains very tight and hard data continues to defy the softer signals sent by survey indicators. The strong labour market is expected to persist this year and should help private consumption grow.
In Germany, the German Bundesbank (GDB) has presented a new proposal of a reform of the German debt brake. The proposal is to allow the structural deficit to increase from 0.35% of GDP to 1.4% of GDP, which is around EUR 45bn extra in public deficit per year. We estimate that the reform could increase growth by 0.20 percentage points in 2026, 0.25 percentage points in 2027, and 0.20 percentage points in 2028. For details, see page 2-4 in Research Germany: Limited economic impact from German election, 6 February.
In Sweden, the Riksbank decided on 4 March to exchange an EU payment of a total amount SEK 3,357m. The exchange is not expected to have any impact on the current monetary policy, and the effect on liquidity in the banking system is neutralised through FX-swaps. We do not expect it to have any meaningful impact on the market.
On the geopolitical front, the implementation of tariffs by the US on Canada, Mexico, and China was immediately retaliated by China and Canada. China responded with import tariffs on US farm products and restrictions on certain US companies. Overall, China’s response is moderate, avoiding escalation, with the new tariffs affecting far fewer goods. Canada retaliated by imposing 25% tariffs on USD 30bn of US imports with immediate effect. Mexico is currently waiting until Sunday before announcing its next steps. The uncertainty and concerns once again sent US financial markets reeling.
Following Trump’s suspension of US military aid to Ukraine, European Commission President Ursula von der Leyen proposed the “Rearm Europe” plan, aiming to boost EU military spending by up to EUR 800bn through a mix of private and public funding. The plan suggests using EUR 50bn in EU loans and repurposing funds, with potential changes to European Investment Bank rules. Details remain scarce, but more information is expected at an EU leaders’ meeting on Thursday. Read our view on the rearmament of Europe in Research Global: Arming Ukraine is the cheap option for Europe, 3 March.
Regarding the war in Ukraine, Trump has stated that Ukraine is willing to come to the peace negotiating table, according to a letter from Zelenskiy to Trump. Furthermore, Trump said he received strong signals that Russia is ready for peace. However, details are sparse and specifics on resolving the conflict are unclear.
Equities: Global equities declined by more than 1% yesterday, with Europe leading the downturn as some key indices, such as the DAX, lost over 3%. There are various perspectives on this development. The bears might interpret the steep drop as just the beginning, anticipating that tariffs will soon be imposed on Europe, and worth noting that we are only one and a half months into Trump’s presidency.
On the other hand, the bulls would highlight that the DAX is up 12% year-to-date despite the prevailing uncertainty. They would suggest that the improvement in European and German macroeconomic data is more significant than the noise from the US administration. Additionally, the bulls may point to the proposed EU defence package of EUR 800bn and the window of opportunity in Germany for historical infrastructure and defence spending of EUR 500bn.
We usually tend to downplay the political impact on financial markets, especially equities. However, politics is currently at the forefront, necessitating an assessment of the most likely outcomes and the associated risks and opportunities.
To add perspective, it is essential to note that this is a unique situation rather than a classic macro-driven sell-off. Take a look at some of the interesting cross asset moves yesterday:
Consumer staples in Europe increased despite the broader indices’ significant drop. This indicates that investors are not yet overly nervous but are instead rotating their portfolios as much as selling equities. Bond yields remained relatively stable yesterday, with the long end even rising in the US. There was no safe-haven flow to the dollar, oil fell by only 0.2%, and bitcoin even gained yesterday. This suggests that investors are undecided about the direction of the global economy, which naturally creates both upside and downside risks. Moreover, our assessment is that investors do not expect these tariffs to remain for long. As we noted yesterday, nothing is set in stone with Trump. This was quickly proven as Lutnick commented late yesterday that Mexico and Canada have “promised to do better”, suggesting that Trump could announce some tariff relief as soon as today (Wednesday)!
In the US yesterday, the Dow was down 1.6%, the S&P 500 fell by 1.2%, the Nasdaq declined by 0.4%, and the Russell 2000 decreased by 1.1%. Asian markets are higher this morning. To further underscore the dominance of the political agenda, the National People’s Congress is also taking place these days. The most interesting aspect from the first day, in our opinion, is the 4% fiscal deficit target. With signs that the Chinese property market is approaching a turning point and increased fiscal flexibility in China, this could attract positive attention from investors. Futures this morning are a story of their own, with the DAX currently almost 2% higher. Let this serve as a reminder not to panic when Trump is dictating market direction, as there is a risk of being caught off guard more than once. US futures are also solidly higher this morning, though not to the same extent as in Europe.
FI: Yesterday, EU announced a new defence package called ReArm EU, in which they will spend EUR 800bn on the defence of EU. Hence, like the SURE and NGEU made during the Covid crisis, we see that when EU is being put under sufficient pressure they can act quite fast with a significant fiscal package. On top of this, Germany is looking to do a joint package on defence and infrastructure of at least EUR 500bn.
This has put solid pressure on ASW-spreads given the potential issuance. Furthermore, the curves have steepened from both the short and long ends. In the short end yields declined ahead of the ECB meeting on Thursday. We have also seen a rise in the short-dated interest rate volatility, but seen over a 5Y period it still seems very modest.
FX: EUR/USD rallied on broad EUR optimism, supported by reports that Germany will establish a new 500bn EUR fund for defence investments, along with renewed hopes for a ceasefire in Ukraine as Zelenskiy signals willingness to negotiate with Russia to end the war. Rising growth concerns in the US have also fuelled the rally in the cross. Similarly, EUR/SEK retraced its move lower after the SEK was off to a strong start to the week. NOK remains challenged by US growth concerns alongside OPEC+ surprising by proceeding with output hikes in April. While risk-sentiment has taken centre stage for EUR/CHF lately, focus turns to the release of Swiss February inflation this morning.
