US Equities Drop amid US Growth Concerns

In focus today

Focus in the euro area is on the ECB watchers conference where several ECB officials will be present. We will particular pay attention to Lagarde’s speech at 09:45 CET.

From the US, the January JOLTs labour turnover survey is due for release. The number of job openings is a key measure of labour demand for the Fed. Markets will also pay close attention to the NFIB’s small business optimism survey given the ongoing political uncertainty and its negative impact on business confidence.

In Sweden, the Riksbank attends a parliamentary hearing on 2024 and current monetary policy. The hearing starts at 09.00 and ends at 11.30. All five board members will participate. We hope to get some clarity on how the individual members assess the risk balance between higher-than-expected inflation prints and the still fragile recovery.

Overnight, many large Japanese companies will announce their responses to their union’s demands. Unions have requested a 6.1% pay increase this year, the highest in 32 years. Solid pay increases are key for the continued economic recovery in Japan and the outlook for a continuation of Bank of Japan hikes.

US and Ukrainian officials are meeting in Saudi Arabia today to discuss strategies to end the three-year conflict between Russia and Ukraine. Although Zelenskyy spoke with the Saudi Crown Prince yesterday, he will not attend today’s meeting. However, he assured that Ukraine will participate constructively.

Economic and market news

What happened yesterday

In euro area, the Sentix investor confidence indicator increased more than expected in March to -2.9 (cons: -9.3) from -12.7 in February. Although the index remains low historically, the upward trend is positive, marking its highest level since June. Historically, the Sentix indicator has correlated well with the PMIs, suggesting an expected rise in PMIs for March as well.

In Germany, the Greens declared that they will not support the coming chancellor Merz’s spending package and change of the debt brake. This announcement precedes the parliamentary vote next Tuesday, where the CDU and SPD requires support from the Greens for a two-thirds supermajority to pass the bill. However, we see the statement from The Greens as a negotiating tactic to get concessions e.g. on more green spending in the fund and not an outright refusal of the package. The proposal from the SPD and CDU/CSU aligns closely with the Greens’ election campaign so we expect them to eventually back a package, which also seems to be the conviction in markets that moved only marginally on the news.

German industrial production exceeded expectations in January, increasing by 2.0% m/m (prior: -1.5%, cons: 1.5%). The less volatile three-month comparison shows stable production from November 2024 to January 2025 (0.0%). Although production has stabilised, it is premature to declare the end of the previous declining trend, given its volatility and PMIs below 50.

In Denmark, Danish CPI inflation rose to 2.0% (prior: 1.5%), slightly exceeding expectations. This marks a return to 2%, a level not seen since summer 2023. The increase was driven by rising electricity prices, and rent. Rent increases were partly due to adjustments in subsidised housing, indicating some costs are still being passed to tenants. Overall, Danish price pressure remains relatively muted.

In Sweden, the monthly indicators presented mixed signals. The GDP indicator, known for its unreliability, fell 0.5% m/m but showed positive y/y growth. Household consumption, typically volatile but reasonable measure, decreased from December, indicating a sideways movement overall. Industrial orders exceeded expectations, rising 16% y/y. Private production remained stable, with industrial production value down following a strong previous month. This aligned with our view that Sweden’s business sector was performing well, while households continued to face challenges.

In Norway, core inflation increased to 3.4% y/y (prior: 2.8%, cons: 2.9%) in February, notably exceeding Norges Bank’s estimate of 2.7%. This unexpected increase raises the question of whether Norges Bank will reconsider its plan to cut rates in March, especially as January figures also exceeded expectations, hinting at accelerating inflation. The likelihood of Norges Bank cutting rates in March has decreased (from almost 100%), and it has become a very close call by now. Markets are pricing 14bp worth of rate cuts for the March meeting and hence close to a 50/50 call. We still expect Norges Bank to deliver the 25bp cut.

Equities: US equities were in free fall yesterday. Nasdaq plunged -4%, marking its worst day since 2022. This was not a rotation into defensives or European shares, but a full-blown growth fear reaction from investors. Clearly, markets tested the Trump put. Or the Musk put for that matter, with Tesla leading the declines by dropping -15%, marking its worst day since 2020. Magnificent Seven all sharply lower, in the ballpark of 2-5%, thereby leading the declines. However, value cyclicals like banks and materials were hit as well. Hence, equal-weight S&P 500 was also dramatically lower, but outperforming cap-weighted index by 130bp. Unlike the last weeks, risk-off also spread to Europe, triggering a classic risk-off rotation leading cyclicals (banks, tech, industrials) to drop 2-3% while defensive stocks were higher. VIX rose to the highest level since August last year.

S&P 500 is now down -8.5% and we are therefore closing in on correction territory. Nasdaq is already there, down -12%. This means that we are inches away from a level where markets typically trough if we are not heading for recession. If this is indeed a correction, positioning is our best friend. Our correction monitor is turning closer to typical “oversold conditions” but not quite there. There are still many more calls in the market, CTA beta remains high, valuations are bloated, and LIBOR vs OIS (the banks stress indicator) is at normal levels. On top of this, markets are in the hands of Trump and not fundamentals. This combination does not make us bold. Hence, we stick to our Europe vs US allocation and do not recommend overweighting US shares just yet.

FI&FX: US yields resumed the decline in yesterday’s session amid rising recession fears in markets sending US equities severely in red territory on the first trading day of the week. 10Y and 2Y US swap yields both fell by around ~8 bp which also contributed to stalling the EUR rates sell-off. The Bund ASW-spread is still trading around -12bp. In the Scandies the NOK CPI surprise drove a substantial flattening of the curve with 2s10s dropping 7bp amid markets now pricing the “promised” March Norges Bank rate cut as a close to 50/50-event. This also contributed to NOK being the big overperformer in FX markets even despite Brent Crude oil prices falling below USD 70/bbl on rising growth concerns. EUR/SEK rose somewhat in the early part of yesterday’s session now trading just below the 11.00 mark. EUR/USD did little during yesterday’s session.