In focus today
In the euro area, focus turns to the unemployment rate for January. The labour market has continued to prove very resilient with record-low unemployment at 6.3%, which is also the expectation for January.
Economic and market news
What happened overnight
In Japan, the unemployment rate surprised to the topside, coming in at 2.5% in January (cons: 2.4%), up from 2.4% in December. Meanwhile, the jobs-to-applications ratio increased to 1.26 in November (cons: 1.25), up from 1.25 in the previous three months.
What happened yesterday
In the US, the ISM manufacturing index declined from 50.9 to 50.3 in February (cons: 50.7), suggesting that the rebound in production stalled in February. The message from today’s ISM data is rather different compared to PMI figures, which were revised slightly higher from 51.6 to 52.7 in the final numbers out earlier today. Looking ahead, the risk related to tariffs on key trading partners could add to the ongoing rise in input prices, which could add to goods inflation depending on pricing power across producers.
In the euro area, HICP inflation declined to 2.4 % y/y in February from 2.5% (cons: 2.3%). Core inflation also fell slightly less than expected to 2.6 % y/y from 2.7% y/y (cons: 2.5%). The decline in core was due to services inflation, which declined due to the weaker momentum seen in the past months and base effects. It was overall another print that supports further rate cuts by the ECB but that also shows that upside risks from wage growth to services inflation remains as momentum continues to be too high. Yet, with falling wage growth we also expect services inflation to decline further, which in combination with low goods price increases should sedt core inflation below the 2% target from summer this year.
Furthermore, final manufacturing PMI for February was revised slightly up to 47.6 from the initial 47.3 in the flash release. We anticipate that the manufacturing PMI will continue to gradually increase and reach the 50-mark after the summer, supported by declining policy rates and increasing domestic demand.
In Sweden, PMI for the manufacturing sector came in strong, rising from 53.0 to 53.5, driven by a broad increase in production, orders, employment and delivery times. Only the delivery time sub-component declines, but overall, a solid print and average over the last six months is 52.9.
On the geopolitical front, US President Trump Donald Trump confirmed the imposition of 25% tariffs on all imports from Canada and Mexico, effective today, 4 March, which intensified market concerns and sent financial markets reeling. Furthermore, Trump signed an executive order raising additional tariffs on Chinese imports from 10% to 20%, also effective today. In a joint meeting with TSMC, the Taiwanese semiconductor company, Trump also announced a plan for the world’s largest contract chip maker to invest USD 100bn in building five additional chip facilities in the US in the coming years.
Additionally, the US announced the suspension of its military aid to Ukraine to pressure President Zelenskiy to settle a deal with Russia amid tensions with President Trump. This move could advantage Russian forces and challenges European allies to increase support for Kyiv. The announcement comes after a day in equities when Europe’s defence sector experienced a significant rally, with substantial share price increases as investors anticipated increased military spending by European governments.
Equities: Equities rallied and sold off yesterday. The most intriguing aspect to consider is whether it is more interesting to observe European equities rallying despite the known risk of tariffs and yesterday’s deadline, or to see US stocks being sold off throughout the session, which, in our opinion, should be viewed as a result of Trump’s tariff policies. Of course, global indices are down significantly, as the US constitutes the majority of these indices, and the US drop exceeded the gains in Europe. However, it is worth noting that financials and industrials rose alongside some defensive sectors on a day when we received confirmation of some of the largest tariff increases in modern history. When we mention confirmation, it is because Trump announced it yesterday, but nothing is set in stone, and he might change it today.
Secondly, the MAG 7 lost 3.1%, and other high-flying assets from last year, like crypto currencies, took a hit yesterday. In other words, the financial market reaction is not a direct reflection of what the macro impact of the tariffs will be, but rather a rotation away from some of last year’s winners and the highest-valued segments of the equity market.
Similarly, Chinese equities are higher at the time of writing, just after the year-to-date tariff increase reached 20 percentage points, nearly twice the 12-percentage point rise seen during the 2018-19 trade war. From a macro and earnings perspective, this makes very little sense, but from a valuation and under-owned perspective, it tells a compelling story.
Thirdly, where do we see the most significant stress right now in our correction monitor? It is among the US retail investor segment, where we have a negative z-score of -2.8. This is quite indicative of how divergent the equity space is at the moment and how we have off-setting forces at play. In the US yesterday, Dow -1.5%, S&P 500 -1.8%, Nasdaq -2.6%, and Russell 2000 -2.8%.
To put things further into perspective, most US indices are lower for the year, while major European indices are up double digits, and the Hang Seng is nearly 15% higher year-to-date. Futures are lower in Europe this morning. In rounded numbers, at the time of writing, Europe is down about 0.7%, and the UK and Germany are down about 0.5%. In other words, down less than the indices rose yesterday. US futures are higher by 0.1-0.5% at the time of writing.
FI: The risk of a potential significant increase in defence funding across the euro area led to a significant sell-off yesterday driven by the long end, and particular Germany. The 30y German yield rose 10bp, slightly more than the 10y Bund by 9bp to briefly touching above 2.5%. The risk of additional supply for defence, coupled with the announcement of a long 15y Belgian bond (2042), the new 10y Dutch bond to come to the market today as well as Austria tapping the 2035 and 2053 bonds meant significant long-end supply to be absorbed. There is also potential of a new German 30y syndication to be announced today, see Reading the Markets EUR A cut is the easy part, 28 February, where we look at the pricing of the new 30y Benchmark bond.
FX: Monday was an eventful day for FX markets. SEK was among the big winners amid an outperformance in European assets with EUR/SEK declining close to the 11.00 mark. Conversely, EUR/USD was in for a strong performance, gaining 1% trading close to the 1.05 mark. CAD was left vulnerable as Trump reiterated that Canada (and Mexico) could not avert the 25% tariffs scheduled to take effect today, 4 March. Oil prices dropped yesterday after OPEC+ surprised the market by announcing it will proceed with scheduled production hikes from April – the market had likely expected the cartel to postpone hiking output yet again.
