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• US equity markets experienced a slight downturn due to concerns about inflation impacting consumer spending, highlighted by Walmart’s cautious outlook.
• The upcoming US PCE data is crucial as the Fed’s preferred inflation measure.
• Japanese inflation data will also be key this week as markets eye the Bank of Japans next move.
• German elections take place over the weekend in what could be massive for Europe as a whole.

Week in Review: Tariff Chatter Continues to Drive Market Moves

Markets had another interesting week as US President Donald Trump pledged more tariffs ahead. A potential peace deal appears to be gaining traction between Russia and Ukraine but this did little to dent the appeal of Safe havens as Gold continues to hold the high ground.

US Equity markets did take a slight hit toward the backend of the week largely driven by news from Walmart.

The $780 billion retailer reported strong holiday and January sales, thanks to wealthier customers looking for deals. However, it warned that inflation could hurt shoppers, causing its stock value to drop by 6%. This shows that the economic optimism seen after Donald Trump’s election may be starting to fade.

Walmart acknowledged “uncertain times,” which led to a cautious outlook and a $50 billion drop in its market value. Being a key indicator of U.S. spending habits, Walmart’s concerns matter. Even Donald Trump admitted that “inflation is back,” and research shows consumer confidence in business and jobs fell sharply in January.

Wall Street is also uneasy. David Kelly, a strategist at JPMorgan, warned about risks to economic growth from new policies, including tariffs and deportations. If Walmart is feeling nervous, it could signal a growing wave of fear in the economy.

This was compounded by weak US data as the S&P Global data showed that U.S. business activity barely grew in February as worries about import tariffs and major government spending cuts increased.

The S&P 500 and Nasdaq 100 both printed fresh highs before a selloff on Thursday and Friday, reflecting the market’s concerns about these developments.

Source: LSEG

On the commodities front, Gold continued its advance this week but did have a bit of a seesaw run. The one concern that bulls may have is that this week’s rally failed to print fresh all-time highs. Is this a sign that bullish pressure may be waning?

Oil prices had an interesting week with gains every day before a significant selloff on Friday left Brent crude trading flat for the week. Supply jitters continue to persist, but President Trump’s wish of lower energy and oil prices clearly is weighing on the minds of market participants. News filtered through today that the US is putting pressure on Iraq to restart the pipeline to Turkey which could explain the fall in Oil prices, or at least partially so.

On the FX front, the US Dollar struggled this week largely due to a massive selloff on Thursday. This was a surprise given that Wednesday FOMC minutes showed the Fed is concerned about the impact of tariffs on inflation. This has led to the idea that rate cuts may be pushed back later in the year than had been previously anticipated.

The Week Ahead: US CPE Will be Key After Hot US CPI data, German Elections are in Focus as Well

Asia Pacific Markets

The main focus this week in the Asia Pacific region for me will be inflation data from Japan while we also have some Chinese data to monitor.

The week’s key focus is Tokyo’s inflation data, expected to hold at 3.3% in February. Rising fresh food prices may drive costs up, but energy subsidies should balance this out. The BoJ will monitor if higher food costs, like rice, are affecting consumers. Economic data suggests a slow recovery, with industrial output improving due to exports and retail sales boosted by better wages and more tourists.

China’s schedule for economic data is light in the last week of February. On Tuesday, the People’s Bank of China is expected to decide on the medium-term lending facility (MLF) rate. Since the focus has shifted to the 7-day reverse repo rate as the main policy tool, no changes to the MLF rate are expected this month. Any surprise however could have a knock on effect on emerging markets.

Europe + UK + US

In developed markets, the US CPI release last week really stoked concerns about higher rates for longer. However, Fed Chair Powell was quick to stress how the Fed prefers the PCE data as their inflation gauge and cautioned against reading too much into the CPI release.

Next week’s PCE data includes the Fed’s preferred inflation measure, the core personal consumer expenditure (PCE) deflator. While the core CPI rose by a concerning 0.4% month-on-month, other data suggests that the core PCE deflator is likely to show a smaller increase of 0.3%. To reach the 2% yearly inflation target, monthly inflation needs to average 0.17%. Due to these factors, it’s unlikely we’ll see any rate cuts before the September FOMC meeting.

Europe’s most industrialized economy faces a big weekend as Germans head to the polls in what will be a key election for Europe as a whole. The German economy faces a host of challenges while the question of immigration has also been a key campaign point.

The elections could have an impact on both the Euro and German Bunds as well when the market opens on Sunday night.

Chart of the Week

This week’s focus is on the US Dollar Index (DXY) after Thursday’s selloff and a break of the key level of support at 107.00.

Moving into next week and with the PCE data on the horizon, will the DXY rebound? That is the big question for market participants.

Currently the DXY has found support at the 100-day MA resting at 106.47 with a bullish inside bar candle close on Friday.

This leaves me to believe that we could get some bullish strength on Monday and perhaps a retest of the 107.00 handle.

More tariff chatter could help propel the DXY above the support turned resistance at 107.00, however in the absence of tariff chatter the DXY may grind sideways until the release of the PCE Data.

US Dollar Index Daily Chart – February 21, 2025

Source:TradingView.Com (click to enlarge)

Key Levels to Consider:

Support

• 106.47
• 106.13
• 105.63

Resistance

• 107.00
• 108.00
• 108.49

Canadian Highlights

• Headline inflation for the month of January rose to 1.9% year-on-year, while price pressures built in core inflation measures.
• Canadian retail sales surged in December, registering its largest monthly gain in nearly three years. Spending fatigue likely set-in in January.
• Tariff-related uncertainties may be trickling into housing markets as existing home sales took a step back in January.

U.S. Highlights

• Fed Speakers this week emphasized the need for a data-dependent approach to policy decisions.
• As a result, next week’s inflation data in the Personal Income and Outlays Report for January will be closely watched.
• From our lens, the Fed is likely to remain on pause until the second quarter of this year, delivering two cuts by year end, as healthy economic activity supports the labor market and price growth.

Canada – Inflation and (Hockey) Elation

Canada, the spotlight is yours. Team Canada trumped the Americans in a hard-fought hockey game worthy of an applause for both teams. Hockey scores weren’t the only thing on the ticker as Canadian economic data was headlined by a warm inflation print and complimented by a very upbeat consumer spending report. Elsewhere, momentum in home sales halted in January, a relative weak spot amid the broader strength in other data. Taken together, markets have pared back the probability of a 25 basis point (bp) cut at the next Bank of Canada (BoC) rate announcement on March 12th to around 25%. That said, much will happen between now and then, including the outcome of President Trump’s plan to move forward with his threatened 25% tariffs (10% on energy) on Canadian imports.

Inflation for the month of January edged up to 1.9% year-on-year (y/y), with rising energy prices making the biggest contribution to headline growth. Price growth was partially offset by the GST/HST holiday, while food price inflation found some respite, falling for the first time in nearly eight years. Headline inflation has stabilized around the Bank’s 2% target, though near-term risks are tilted to the upside as the end to the tax break will lead to higher inflation in coming months. The Bank’s preferred core inflation measure ticked up to 2.7% y/y and has hovered above 3% on a 3-month annualized basis for the past several months (Chart 1), something coming into greater focus as the BoC deliberates its next move.

The cumulative 200 bps in interest rate easing since mid-2024, combined with the GST/HST tax break supported a 2.5% m/m surge in December retail spending, the largest increase in almost three years. Inflation-adjusted spending has strengthened over the past few months (Chart 2), supporting our call for an above-trend reading for Q4-2024 GDP growth. Even as spending momentum slows in the first quarter, the consumer is expected to be a pillar of strength for overall growth in 2025. That said, tariff uncertainty could stymie consumption progress to the extent that U.S. policy negatively affects Canada’s job market and wages.

Housing was the only dull point this week, as existing home sales slipped by 3% m/m in January. This was coupled with a surge in new listings that popped by the largest seasonally adjusted amount on record, pulling markets to the lower end of balanced market conditions. Tariff uncertainty may have weighed on buyer sentiment towards the end of January, but easing price pressures and further interest rate cuts should maintain a solid foundation for the housing market in coming quarters.

So where to from here? Our recently released Q&A discusses how the BoC may react to trade war scenarios. To take out insurance against escalating trade tensions, we think the BoC will prioritize the downside risk to growth and front-load interest rate cuts over the first half of the year, bringing the policy rate to 2.25%, the lower end of the Bank’s neutral range estimates.

U.S. – Data Dependent Decisions

In the absence of major economic data, equities and Treasury yields were a smidge below where they started the week after reacting to a flash PMI release on Friday that suggested shrinking activity in the services sector in February (Chart 1). That said, the focus is on next week, when the second update of fourth quarter GDP and January’s Personal Income and Outlays report will give a fresh look at economic momentum and the first look at the Fed’s preferred inflation metric for 2025. Fed speakers provided some insights this week on why the data-dependent approach is key when looking to understand how inflation will evolve in a still-healthy economy.

At the start of the week Board member Christopher Waller gave a speech in Sydney with a title that left very little ambiguity, “Disinflation Progress Uneven but Still on Track. Rate Cuts on Track as Well.” The speech clearly outlined his views, including that monetary policy is restrictive and “putting downward pressure on inflation”, while economic momentum is holding up. Vice Chair Jefferson spoke later in the week, reaffirming the view that the economy and labor market are on solid footing, and the need to maintain a data dependent approach. Dr. Jefferson focused on the strength of household balance sheets and how they are supporting consumer spending. The key was that while they are generally in good position, households with lower- and middle-incomes “have less of a buffer of liquid assets than they did before the pandemic” and keeping an eye on balance sheet developments will help “inform forecasts of overall economic activity”.

One interesting concept to monitor was Dr. Waller’s acknowledgement that progress on cooling inflation in the early part of the year has been notably slow in past years. This could be attributable to “residual seasonality”– the idea that the price adjustments that usually come in the early part of the year are now bigger than they were typically and are showing up in the seasonally adjusted data that should have accounted for them. This is an interesting wrinkle, and Dr. Waller cited research that price pressures have tended to be greater in the first half of the year relative to the second in 16 of the past 22 years. The expectation then would be that even with stronger-than-expected inflation in the early part of the year, this effect should fade into the latter part of 2025, as it did in 2024.

With speakers emphasizing the data-dependent approach, the focus will then be on the Personal Income and Outlays report on next Friday. The spending figures could be noisy, as cold weather and large fires in Los Angeles likely disrupted economic activity, so the focus will be on what happens with inflation. Current expectations are for the core PCE price index (the Fed’s preferred inflation gauge) to clock in at around 0.2%-0.3% month-on-month in January (2.6% year-on-year, Chart 2), but as Dr. Waller suggested even an upside surprise could be due to some residual seasonality. From our lens, the Fed is likely to remain on pause until the second quarter of this year, delivering two cuts by year-end, as healthy economic activity supports the labor market and price growth.

Summary

United States: Housing Market Troubles to Continue

• Residential construction and existing home sales were muted in January, illustrating continued stress on the housing market amid elevated mortgage rates. Despite the pressure on interest-rate-sensitive sectors, underlying consumer demand is robust and has helped the labor market stand on firm footing.
• Next week: New Home Sales (Wed.), Durable Goods (Thurs.), Personal Income & Spending (Fri.)

International: G10 Central Banks Ease Monetary Policy Further

• The Reserve Bank of Australia began its easing cycle this week with a 25 bps rate cut. However, that appeared to be a tentative first easing step, given a still-tight labor market and as the central bank raised its medium-term inflation forecast. The Reserve Bank of New Zealand cut rates 50 bps this week but should slow the pace of rate cuts going forward, while elevated core inflation from Canada now means we expect the Bank of Canada to hold rates steady in March.
• Next week: India GDP (Fri.), Canada GDP (Fri.)

Credit Market Insights: Household Debt Balances Continue to Climb

• Total household debt increased by $93B in Q4 of last year to a new high of $18.04T. All categories of debt rose over the quarter, with credit card balances increasing the most, rising $45B to $1.21T. Though households continue to borrow, household debt has increased at a slower rate in recent quarters, suggesting consumers may be feeling the pinch of higher rates.

Topic of the Week: Republicans Approach a Budget Reconciliation Milestone

• Passing a budget reconciliation bill is critical to enacting Republicans' policy objectives for taxes and spending, and the next couple of weeks will mark an important first step in Congressional Republicans' efforts on this front. In this section, we discuss how the early innings of this process are shaping up.

Full report here.

Canadian gross domestic product will be in focus after firmer labour market reports in December and January, and an upside headline inflation surprise increased the odds that the Bank of Canada will forego another rate cut in March.

Our expectation is for real GDP to rise 1.5% on an annualized quarter-over-quarter basis in Q4. Household spending has been showing signs of life in the wake of earlier interest rate cuts. We expect consumer spending rose 3% in Q4 on the largest retail sale volumes increase since Q3 2021. And, residential investment likely posted a second consecutive quarterly increase driven by higher building activity and surge in home resales. But, business spending has remained significantly softer—imports of machinery and equipment fell again in Q4, and an uncertain global trade backdrop will continue to weigh on business investment plans in 2025. Labour markets have firmed in recent months, but actual hours worked declined by 0.2% in Q4—the first quarterly drop in a year.

Growth momentum on a monthly basis appears to have faded later in the quarter. For December, we expect GDP edged up 0.1%, below Statistics Canada’s flash estimate a month ago of 0.2% growth and only partially retracing a 0.2% decline in November. Retail sales was robust in the December holiday shopping period—Canada’s tax holiday likely boosted a significant amount of goods consumption. But, accommodation and food services spending pulled back and December manufacturing sales came in substantially softer than preliminary estimates with details pointing to a contraction in output in the sector. Work stoppages in the transportation sector at ports and Canada Post in November and December will continue to distort the data, but Statistics Canada’s preliminary GDP estimate pointed on net to another decline in transportation and warehousing.

We expect the signs of life in the household sector and upside inflation surprises in recent months will be enough for the BoC to stand pat on interest rates in March for the first time since June 2024. The potential for significant tariff hikes remain a downside risk to economic growth and the interest rate outlook, but absent a trade shock, economic data is suggesting Canada’s economy may be faring better than initially feared.

Week ahead data watch

Next Thursday, job openings from SEPH will be watched closely for signs that labour market conditions are beginning to stabilize – job openings were still running 23% below year-ago levels at last count in November but postings reported separately from indeed.com rose in December.

U.S. Personal spending likely dipped by 0.1% in January, in line with the contractions in retail sales during that month. Personal spending is expected to grow by 0.6% in January, supported by higher transfer payments.

StatsCan will release the annual CAPEX intentions survey next Wednesday. The survey is an important annual gauge of business investment intentions but will likely not capture fully the impact that increased international trade uncertainty may be having on investment plans. The survey is typically conducted over the fall and early winter (September to January), which is before the period of significant tariff risks escalated.

Monday, Feb 24, 2025

Tuesday, Feb 25, 2025

Wednesday, Feb 26, 2025

Thursday, Feb 27, 2025

Friday, Feb 28, 2025

• Germany goes to the polls, but far-right AfD unlikely to form government.
• German CPI data might be bigger driver for the Euro.
• US inflation also in the spotlight as PCE report awaited.
• CPI releases in Australia and Japan, Canadian GDP also on tap.

Will German elections change the outlook much?

When Germany’s chancellor, Olaf Scholz, called a snap general election back in December, there was hope that a new government would inject much life into the flagging economy. With the February 23 election day almost here, it’s unclear how consequential Sunday’s vote will be, if at all.

Looking at the latest polls, the conservative CDU/CSU bloc is likely to be the biggest party in the Bundestag. But they will need the support of at least one other party to be able to form a majority government. This is where incumbent Chancellor Scholz’s SPD party comes in. Although the two are not natural partners, a grand coalition may be necessary to keep the far-right AfD out of power.

However, this may be difficult to do if the AfD or far-left parties like The Left get more votes than expected, shrinking the main parties’ shares even more than what the polls currently indicate. The Greens and the FDP have already lost significant votes so any coalition that doesn’t include both the CDU/CSU and SPD may not be very stable.

And with all the main parties having ruled out an alliance with the AfD, Scholz and CDU/CSU leader Friedrich Merz will have no choice but to find enough common ground to steer the country for the next four years. One area where the two parties might struggle, but which is the most crucial for the markets, is the debate about whether to relax Germany’s strict debt brake rule. The German government is obliged constitutionally to keep the structural deficit of the budget at no more than 0.35% of GDP.

Loosening this rule could go a long way in boosting spending to lift the economy out of the doldrums. But the CDU/CSU isn’t too keen on tweaking it and is likely to attach conditions to any agreement to raise the borrowing limit.

Nevertheless, if on Monday morning the election results point to a CDU/CSU and SPD coalition, the euro could enjoy a modest rally, and if in the coming days the party leaders decide to prioritize reforming the debt brake, there could be further gains for the single currency.

However, if the AfD comes a close second, the euro could face some selling pressure as the government may require the party’s votes to pass some legislation even if it’s not included in the new coalition, allowing it to push through some of its far-right agenda.

Data to also matter for the Euro

In the event that the German elections don’t bring about much of a political shift in Europe’s largest economy, traders may turn their attention to the incoming data. The Ifo survey is out on Monday and will shed some light on German business sentiment in February, while on Friday, the preliminary CPI numbers are due to be published.

Eurozone inflation has been creeping higher since October so a further uptick in Germany’s prints could cast doubt on expectations of three more 25-bps rate cuts by the ECB this year.

As for the euro area, the final CPI estimates for January are out on Monday. Investors will also be keeping an eye on the minutes of the ECB’s January meeting due on Thursday. Any worries among policymakers about inflation not coming back down to 2% quickly enough could provide some upside to the euro, although on the whole, it’s unlikely that either the German CPI or ECB minutes will significantly move the needle for rate cut bets.

PCE inflation may keep rate cut optimism alive

Over in the United States, sticky inflation has been an even bigger problem for the Federal Reserve. The headline rate of CPI inched up to 3.0% in January, dashing hopes for two rate cuts in 2025. But the market reaction wasn’t as negative as one would have expected, partly because investors predicted that the PCE measure of inflation, which the Fed attaches more importance to, would not be as hot as the CPI readings.

According to the Cleveland Fed’s Nowcast model, the core PCE price index eased to 2.7% in January from 2.8%, and headline PCE edged down to 2.5%. If those estimates turn out to be correct when the actual numbers are released on Friday and there are no upside surprises in the month-on-month figures, expectations for two 25-bps rate reductions could continue to recover, weighing on the US dollar.

The PCE report will also include the latest stats on personal income and consumption, while earlier in the week, there’s a slew of other releases. The Conference Board’s closely watched consumer confidence gauge is out on Tuesday, to be followed by new home sales on Wednesday. There’s a barrage of indicators on Thursday, including durable goods orders and pending home sales for January, as well as the second estimate of Q4 GDP growth.

Geopolitical risks could support the Dollar

With risk appetite remaining resilient in the face of elevated geopolitical uncertainty following President Trump’s exchange of insults with Ukraine’s President Zelensky, any signs of weakness in the US economy could again encourage investors to ratchet up their rate cut bets even if the inflation numbers don’t back it.

But the US dollar, which is trading near two-month lows against a basket of currencies, still stands a chance of rebounding if the geopolitical headlines worsen. Specifically, a further deterioration in the relations between Trump and Zelensky and vis-à-vis with the EU, or new tariff announcements, could redirect some flows back to the dollar.

Yen and Aussie eye CPI data, loonie awaits Canadian GDP

Elsewhere, it’s also all about inflation. Australia will publish its monthly CPI figures on Wednesday, which are likely to be scrutinized following the RBA’s hawkish rate cut. Although inflation in Australia fell to just 2.4% in the fourth quarter, which is well within the RBA’s 2-3% target band, the monthly pace has been accelerating lately, edging up to 2.5% in December and supporting the need for caution.

Should the January readings show a further simmering in inflation, the Australian dollar could stretch its latest rebound against the greenback, as investors further scale back their rate cut expectations for the RBA.

One central bank that’s likely to welcome strong inflation data is the Bank of Japan, as it aims to normalize monetary policy after years of stimulus. CPI measures both nationally and in the Tokyo region have been trending higher in the past three months, while the economy has been going from strength to strength. Still, investors are at the moment fully pricing in just one 25-bps rate hike for the rest of 2025 and see less than a 50% probability for a second increase.

The producer price index for services is out on Tuesday and the Tokyo CPI estimates for February will follow on Friday. Should they continue to point to a buildup of inflationary pressures, the odds for a second hike could go up, lifting the yen.

Finally, Canadian GDP figures for the fourth quarter will be watched on Friday, amid some uncertainty about the pace of further easing by the Bank of Canada. If it wasn’t for the threat of US tariffs hanging over the Canadian economy, the BoC would likely have switched to a more neutral stance by now. Nonetheless, any positive surprises in GDP growth could see the probability of the BoC keeping rates on hold at the next meeting in March increase from the current 70%, giving the loonie a leg up.

Geopolitics dominated the news flow again this week but overall had limited market impact. The US held peace talks with Russia in Saudia Arabia leaving EU and Ukraine out of the talks. And during the week the relationship between US President Donald Trump and Ukranian President Volodymyr Zelensky clearly worsened culminating with Trump clearly putting the responsibility for the war on Ukraine and calling Zelensky a dictator in a post on Truth Social. EU leaders gathered for a crisis meeting in Paris. They expressed differing views afterwards but overall highlighted support to Ukraine, a need for big increases in defence spending and loosening budget rules to allow for this. The EU Commission has proposed to exclude military spending from budget limits.

On the tariff front Trump said he would impose tariffs starting at 25% on automobiles, pharmaceuticals and semiconductor chips, but gave no details on timing. When asked about a deal with China, he said it is 'possible', but we would not put too much into this. EU said there was 'positive momentum' towards a compromise with US.

On the data front the most interesting was euro PMIs, which disappointed slightly as composite PMI was unchanged at a low 50.2 vs. expectations of a rise to 50.5. Services was behind the weakness whereas manufacturing saw a slight increase. Euro consumer confidence rebounded from -14.2 to -13.6 in February but is still significantly lower than in October. ECB member Isabel Schnabel caught headlines by calling for a debate on a 'halt' to rate cuts. She is among the most hawkish members, though, and other members, while expressing some caution, still point to the need for continued rate cuts. A cut in March is pretty much a done deal but the debate is on what happens after that. We continue to expect ECB to cut rates down to 1.5% as we believe core inflation will fall below 2% over the summer. Markets see the bottom for ECB rates currently at 1.9% by the end of 2025. Bond yields moved a bit higher this week in response to the ECB comments as well as the outlook for more defence spending, but short end yields are still broadly moving in the same range seen for the past five months.

In the US data flow has been light. Regional surveys from Philly Fed and Empire provided little news, although an increase in the price components got some market attention. In China a private sector symposium hosted by President Xi Jinping got a lot of focus and added fuel to a strong equity rally in Chinese stocks that took off after the DeepSeek AI breakthrough in January. Chinese house prices were mixed but still point to tentative signs of stabilisation in the housing market, see also China Headlines, 19 Feb. Japanese inflation ex fresh food surprised to the upside in January rising to 3.2% y/y from 3.0% y/y underpinning our expectations of further rate hikes from Bank of Japan.

Focus the coming week will be on the first country CPIs for February from Germany, Spain, and Italy, which we expect to confirm a downward trend in inflation. German Ifo, euro negotiated wages and credit growth will also be important to gauge developments in the euro zone. In the US we get the core PCE inflation print. Finally we have German election on Sunday, see latest polls here and Research Germany - Limited economic impact from German election, 6 February.

Full report in PDF.

Markets

The European February composite PMI released today matched January’s 50.2 reading. That’s suggestive of near negligible output growth. Services was still the main driver but expanded at a slower pace (50.7 from 51.3). The 23-month long downturn in manufacturing eased slightly (47.3 from 46.6). France was to blame for the marginally weaker-than-expected outcome with a marked reduction in (services) business activity. German activity actually picked up to 51.0 while the rest of the euro zone posted a “solid expansion in output”. New orders decreased for the ninth month in a row with services joining manufacturing in contraction territory for the first time in three months. Employment fell faster than in January with a slight rise in services unable to compensate for a reduction of the workforce in manufacturing. The contrast (of France and Germany) with the rest of the euro area - fastest increase in five months - is once again striking. The above-average increase in input prices was the fastest since April 2023, pushing up output inflation to its highest in 10 months. Optimism for the year ahead dipped to a three-month low on weak(er) readings in Germany and France. Strong confidence was seen in the rest of the euro area.

The market reaction is a kneejerk one with the euro slipping from EUR/USD 1.05 area to an intraday low of 1.046 before paring losses to 1.048. German yields are down between 4.3 and 5.1 bps. The PMIs indeed disappointed on face value but there’s more than meets the eye. The apparent non-stop outperformance of the euro area ex. France and Germany is an important silver lining. Elevated & rising price pressures should also have protected the downside in yields (at least the front end) since it’s supporting ECB board member’s Schnabel’s case this week for a pause in the rate cutting cycle after March. The slight PMI miss therefore feels as markets looking for any excuse to hedge ahead of the German voting weekend. We expect a fiscal impulse to come from whatever coalition that eventually emerges. But the much-needed swiftness does depend on the outcome with a GroKo (CDU/CSU + SPD) offering the best chance for speedy action. Next is the Kiwi coalition (CDU/CSU + Greens), followed by the three-way Kenya coalition (all of the above parties). The performance of the far-right AfD, which is barred from joining any federal coalition, is a key risk. US PMIs disappointed to the downside with services unexpectedly dipping into contraction territory (49.7). Manufacturing improved to 51.6. US yields and the dollar dip in a first reaction.

News & Views

The Czech aggregate confidence indicator rose slightly (0.4 points) to 97.8, but subcomponents showed a divergent picture. Consumer confidence declined for the third consecutive month from 97.0 to 96.6, the lowest level in a year. Consumers expecting the overall economic situation in the country to deteriorate over the next twelve months increased for the third consecutive month, probably due global geopolitical tensions and the potential impact of US tariffs on European economies. Still the number of households assessing current financial situation as worse than in the previous year declined. Aside from today’s data, households are expected to enjoy real income growth and still low employment, which should support consumer demand. Contrary to mediocre consumer sentiment, business confidence improved to the best level since April 2023. Sentiment improved in trade, construction and even slightly in industry. However, conditions in the domestic industry remain poor, well below historic averages. The Czech koruna recently trade rather resilient with EUR/CZK holding near the lower end of the 25.00/25.45 trading range (25.08).

• The UK February composite PMI signaled another marginal rise in UK private sector output (50.5 from 50.6). Higher levels of service sector activity (51.1) helped to offset a solid reduction in manufacturing production (output 47.4 from 49.2). Sales pipelines remained subdued as total new work decreased for the third month running and at the fastest pace since August 2023. Private firms indicated a further steep decline in staffing numbers (sharpest since Nov 2020), largely in response to higher payroll costs and weak demand. Strong wage pressures meanwhile contributed to the fastest increase in average cost burdens for 21 months. S&P also commented that “The lack of growth alongside rising price pressures points to a stagflationary environment which will present a growing dilemma for the Bank of England”.

US Manufacturing PMI rose from 51.2 to 51.6, an eight-month high. However, Services PMI dropped sharply from 52.9 to 49.7, marking a 25-month low. As a result, Composite PMI fell from 52.7 to 50.4, its lowest level in 17 months, signaling a broad slowdown in overall business activity.

Chris Williamson, Chief Business Economist at S&P Global Market Intelligence, highlighted the dramatic shift in sentiment, stating that the "upbeat mood seen among US businesses at the start of the year has evaporated," replaced by a "darkening picture of heightened uncertainty, stalling business activity, and rising prices."

Optimism for the year ahead, which had been near a three-year high, has now dropped to "one of the gloomiest since the pandemic."

Companies are increasingly concerned about the impact of federal government policies, citing spending cuts, tariffs, and geopolitical risks as key headwinds. Sales growth is reportedly slowing amid political uncertainty, while tariff-related cost increases are pushing prices higher.

Williamson added that while the PMI data last year suggested strong economic growth above 2%, February’s report signals a sharp slowdown, with annualized GDP growth now estimated at just 0.6%.

Full US PMI flash release here.

Retail sales rose 2.5% month-over-month (m/m) in December, much stronger than Statistics Canada’s advance estimate of 1.6% growth.

In real terms, sales growth accelerated to 2.5% m/m, reflecting robust spending supported by the GST/HST tax break. This is the highest reading since June 2022.

Motor vehicle and parts dealers saw sales increase 1.9% m/m, building on November's strong 2.0% m/m gain. Ex-autos, sales increased 2.7% m/m, surpassing the 2.0% m/m consensus expectation.

Receipts at gas stations and fuel vendors rose by 4.2% m/m in nominal terms but only 0.7% m/m in real terms, reflecting the impact of higher fuel prices.

Excluding both auto sales and gas station receipts, core retail sales rose by 2.5% m/m in December, rebounding from a 1% decline in November.

Gains were reported across all core categories except furniture and home furnishings stores (-0.5% m/m), with food and beverage stores (+3.5% m/m) being a key driver of growth.

E-commerce sales rebounded by 3.2% m/m, recovering from a 0.7% decline last month.

Statistics Canada’s advance estimate for January suggests that sales were down 0.4% m/m.

Key Implications

Retail activity ended the year with a bang. Given the dampening effect of the GST/HST tax break on nominal figures, real sales provide a better measure of consumer activity, pointing to a swift rebound in spending behaviour.  As a result, we expect consumption growth for Q4 2024 to reach around 4% (annualized), pushing GDP growth above trend.

The key question now is how long this momentum will last. Given the negative flash estimate for January, some of December's strength is likely to fade into early 2025, with consumption growth expected to slow to around 2.0% (annualized) in Q1 2025. That said, the fundamentals remain solid: steady income growth a resilient labour market, accumulated savings along with two-percentage point reduction in the overnight rate, and easing debt-servicing pressure should continue to support consumer spending. However, tariff threats pose a significant risk to this positive outlook. If they begin to erode labour market strength, consumer spending could quickly lose steam.