In focus today
In the euro area, the ECB meeting today is expected to end with yet another 25bp rate cut, bringing the policy rate to 2.50%, 150bp lower than the peak last year. While the cut decision is relatively straight forward, divergences in the ECB’s GC members assessment of the policy stance is starting to show, thus a key question will be whether ECB will already now start to soften is assessment on the monetary policy restrictiveness. Markets are pricing another 59bp worth of rate cuts this year, following today’s 25bp rate cut. We expect ECB to cut more than this to end with a terminal rate of 1.50% in H2 this year, albeit risks are slightly skewed to the upside. See more in ECB preview – A cut is the easy part, 28 February.
In the US, initial claims data released in the afternoon will provide some flavour on the impact of the public sector layoffs initiated by the DOGE initiative. So far, the public sector layoffs have only been visible in the claims data at a regional level (e.g. District of Columbia), but the numbers will likely increase as terminations are being effectuated.
In Denmark, January’s industrial production figures are due, following a 4% increase in December, resulting in 8.6% annual growth in 2024. Unlike the broader European trend, Danish manufacturing remains strong, even excluding pharmaceuticals. February’s bankruptcy statistics are also expected, with January showing a 3.5% rise from December. However, in 2024 we saw a 17.5% decrease in bankruptcies from 2023. Currently, the number of bankruptcies is only slightly above the levels we observed in the years before the pandemic, thus not ringing the alarm bells.
In Sweden, preliminary February inflation will be in the spotlight. Despite January underlying inflation printing an unusually high monthly increase (+0.2%), we have taken a cautious stance assuming a normal increase in February, +0.6 % mom. Energy will contribute net positively to CPIF this month, as increasing electricity prices usually outweigh a decline in fuel prices. Finally, the Riksbank’s rate cuts are now pulling mortgage costs lower, contributing about -0.3 p.p. on the month. Compared to the Riksbank’s forecast (CPIF 2.2%, and CPIF excl. energy 2.4%), we anticipate both CPIF and CPIF excl. energy at 2.7%.
Economic and market news
What happened yesterday
In the US, data painted a mixed picture on the labour market dynamics in February ahead of the NFP release tomorrow. The ADP report showed a weaker-than-expected increase in private-sector payrolls of 77,000 (consensus: 140,000), the lowest print since July 2024. On the other hand, yesterday’s ISM data provided some relief in terms of the worries related to the state of the US services sector. The composite activity measure recorded a rise from 52.8 to 53.5 (consensus: 52.5), standing in strong contrast to the very weak reading in the comparable PMI survey, while the employment measure rose to a 3-year high of 53.5 (consensus: 52.5). Although the ISM measure has been volatile recently, the persistently improving employment signals does suggest that labour demand remains decent despite the recent signs of slowing economic growth.
In the euro area, the final PMIs confirmed the slightly disappointing flash release, as the composite PMI remained unchanged at 50.2. In the services sector the PMI dropped to 50.6 from 51.3, mainly due to France. With the composite PMI above 50 for the second consecutive month, it suggests that the euro area economy experienced marginal growth in Q1.
In Germany, the upcoming German government has proposed a significant easing of fiscal policy through increased public investment, higher defence spending, and a change to the debt brake. We expect these three proposals to be approved in parliament next week with support from the Greens. If passed, the proposals will positively impact the German economy, though we expect to see the effect on GDP next year, with most of the impact in 2027-2028. Financial markets have reacted strongly by driving up yields on German government debt and widening the Bund-ASW spread. We expect the Bund-ASW spread to fall towards 15 basis points in the short term. This will also support Danish government bonds, where we expect the 10-year spread to move towards minus 25 basis points.
In Sweden, services PMI came out a little bit stronger than January at 50.8 (50.2) and looking at the sub-components the employment index rose from 46 to 47.6, so a healthy increase albeit the index remains below the 50-mark. Business volumes and new orders rose marginally as well.
In Norway, house prices rose 0.9% m/m (SA) in February. As such, it was another very strong month for Norwegian house prices which still very much remains a “lack of supply”-story. The message in January from Norges Bank was that the housing market has no impact on the near-term policy setting at this stage and although this is another strong report it does seem like other factors are more important for the number of rate cuts that Norges Bank will deliver this year. We have 4x25bp as base case. Markets price 68bp worth of cuts by the December 2025 Norges Bank meeting.
On the geopolitical front, the U.S. has paused intelligence-sharing with Ukraine in yet another effort at pressuring Zelenskiy towards peace talks with Russia. This step follows the decision on Monday by President Trump to suspend military aid to Ukraine.
Meanwhile, Trump has issued a stern warning to Hamas, demanding the release of hostages in Gaza and pledging unwavering support for Israel. The U.S. has entered direct talks with Hamas for the first time, aiming to secure American hostages’ release amid stalled ceasefire negotiations.
In economic developments, Trump is giving automakers complying with the USMCA rules a one-month exemption from the 25% tariffs on Canada and Mexico, allowing automakers time to move production to the US. This provided temporary relief to the auto industry, boosting stocks like GM and Ford.
Concurrently, oil prices fell to new lows yesterday despite rising equities and a falling USD, which normally pushes oil prices higher. OPEC+’s decision to start hiking oil output along with trade concerns might be dominating the former. It will be interesting to see if the US will use the recent price drop to resume buying of crude for its strategic reserves. That could provide some much-needed support for the market near-term.
Equities: Global equities were higher yesterday, once again driven largely by political developments, despite the release of valuable macroeconomic data that adds more pieces to the puzzle. As mentioned yesterday, there was very encouraging political news from China, Germany, and the EU, particularly on Tuesday. Yesterday, Trump made a small concession regarding the Canada-Mexico tariff, but this does not change the fact that regional political news remains more negative in the US compared to elsewhere.
Here are some equity return numbers to provide context:
- The MSCI World Index is down nearly 4% from its peak but remains 1% higher year-to-date.
- The German DAX is 16%(!) higher year-to-date and is close to reaching an all-time high.
- The Hang Seng Index reached its high for the year this morning, marking a 50% increase over the past year. This serves as a good reminder not to become overly focused on US exceptionalism and the MAG 7 as we exit 2024.
It is also valuable to examine the European sector rotation from yesterday. While the Stoxx 600 rose, led by a more than 3% increase in the DAX, ten industries within the Stoxx 600 fell, resulting in a very split sector and industry performance. This is logical given the potential for significant shifts in German/EU spending. Therefore, review the performance table from yesterday and exercise caution in opposing these trends, especially as long as we have tailwinds from spending negotiations and positive key figures in Europe, led by the manufacturing sector. In the US yesterday, the Dow rose by 1.1%, the S&P 500 by 1.1%, the Nasdaq by 1.5%, and the Russell 2000 by 1.0%. Asian markets are higher this morning, led by China. Futures in the Western world are mixed, with European indices pushing higher and the US being marginally lower.
FI: Wednesday was one for the history books with 10Y Germany yields rising by 30bp, while US rates were basically flat throughout the day. This was a fundamental relative repricing, reflecting that the EU now seems ready to act on the building geopolitical risks. Germany suggesting a loosening of the EU fiscal rules after being the fiscal hawk ‘par excellence’ the past decade is telling of the rapidly changing narrative in Europe right now. Whether the 30bp repricing is adequate or excessive remains uncertain, and we advise caution regarding the short-term outlook, as various political and legal factors in Germany could dilute some policy signals. The aggressive movement in Bunds was mirrored across Europe, with long-end inflation swap rates closing approximately 15bp higher. Markets adjusted by removing 15bp of cuts previously anticipated for the ECB by the end of 2025, bringing the total to 70bp.
FX: It was an eventful session across asset classes yesterday. EUR/USD broke above 1.07 for the first time since the US election, with EUR optimism continuing in yesterday’s session. This move has been fuelled by what appears to be a regime shift in euro area – particularly German – fiscal policy, with large-scale investments in infrastructure and, most notably, defence spending. Akin to the USD, CHF weakened considerably despite Swiss inflation for February coming in stronger than expected. EUR/GBP moved higher on the broad-based EUR optimism and combined with the high-volatility environment, it was a poor cocktail for GBP. SEK remained fairly unscathed and is eying the release of February inflation this morning.
