US Payrolls are on Tap

Markets

Main action on the German/European yield curve remained centered at the long end of the curve in the wake of Germany fiscal “whatever it takes”. German yields added up to 4.1 bps (10-yr) in a daily perspective. Towards the end of the trading session, the German Bund future tried to fight somewhat back after this week’s violent sell-off. Despite any potential hiccups, we thing laws of gravity still count for Bunds over the medium term, eyeing a return for the German 10-yr yield to the 2023 top just north of 3%. The front end of European yield curves was broadly unchanged despite the ECB meeting. The European central bank extended its cutting cycle by lowering key rates by another 25 bps (deposit rate now 2.5%). New inflation forecasts were almost unchanged with GDP prognosis facing a small downward revision. It was too early to assess the potential impact of this week’s German/European spending pledge, but they entail upside risks to both growth and inflation. The ECB believes its monetary policy is now meaningfully less restrictive, not ruling in or out anything for the April policy meeting. Data will decide on the outcome, but these are scarce with only one additional PMI survey (likely to show more optimism) and one additional CPI release. EMU money markets discount a 75% probability for another cut, but our preferred scenario is a pause. The single currency managed to hold on to this week’s gains, taking out 1.0804 resistance next (62% retracement on Sep24-Feb25 decline) and opening a path to full retracement (target 1.1214). Today we have more attention to the USD-side of the equation. First, the US administration seems to be sensitive to the market moves triggered by its explosive policy mix. Tariff wars and DOGE cost cuts put a US recession risk premium on US assets, with US stock markets significantly underperforming European equities, US Treasuries outperforming German Bunds and the dollar suffering. The US administration yesterday announced a significant turnaround on tariffs against Mexico and Canada, exempting all goods covered by the USMCA trade deal until April 2. There was also a first pushback against DOGE-efforts (the scalpel rather than the hatchet). It so far failed to lift US spirits, but should be taking into account going into the weekend and following recent moves. Second, US payrolls are on tap. Consensus expects solid job growth (160k). We still believe in asymmetric risks with markets especially responding to weaker numbers which could support front end US Treasuries and weigh more on USD. Finally, US Fed Chair Powell speaks on the US economic outlook after European close. The timing is striking, just ahead of the blackout period for the March 19 FOMC meeting and might be used to steer market expectations. The March policy rate status quo can be taken for granted, but Powell could give more weight to downside economic risks, suggesting that the pause might be shorter than envisioned back in January.

News & Views

The president of the Eurogroup – the bloc’s finance ministers – Donohoe said there’s a clear path for the euro to improve its position as a global currency. This is currently a dollar privilege. The USD makes up about 57% of global reserves compared to 20% for the euro. However, that USD share is down from 61%, with some analysts expecting that to go down further in the coming years, driven by amongst others increasing US isolationism. Donohoe said the euro should must take advantage of this huge opportunity. The “heightened level of urgency” to expand EU capital markets and adopt a digital euro would help strengthening the common currency as well as the upcoming massive defense investments, including in Germany. This would deepen and bring more liquidity to the European bond market, seen as prerequisites for any currency aiming for a global role. The US Treasury market’s scale amounts to $28tn compared to the €1.8tn market for German bonds.

Yesterday’s special EU defense summit produced two separate statements. In the first, 26 of the 27 leaders pledged “enduring” support for Ukraine and called for both Kyiv and Europe to be involved in any negotiations about ending the war. It also mentioned EU states to “contribute to security guarantees based on their respective competences and capabilities” in a post-war Ukraine. Hungary did not sign this statement but did agree with another in which EU member states endorsed the new funding initiatives proposed by the Commission. These include changing the bloc’s deficit rules to exempt defense spending from it and an instrument that would provide €150bn in European loans to capitals. “Europe must become more sovereign, more responsible for its own defense and better equipped to act and deal autonomously with immediate and future challenges and threats with a 360° approach.” The details will now have to be hammered out over the coming weeks with the March 20-21 Summit a candidate for concrete measures to be announced.