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After some volatile weeks, markets were relatively calm this week, as there were no big surprises, also not from the US central bank. As expected, the Fed did not change interest rates, but the bank lowered its forecast for GDP growth this year from 2.1% to 1.7%, while increasing its inflation forecast from 2.5% to 2.7%, both consistent with a larger effect of tariffs. Whether that speaks for higher or lower interest rates than would otherwise be the case depends on whether tariffs are expected to persistently lift inflation and not just cause a one-off price increase. Fed chair Powell seems to think that a persistent effect is unlikely, and markets reacted to the adjustments by sending yields slightly lower, also because 18 out of 19 members of the monetary policy committee indicated that they see risks for growth mostly to the downside, whereas the outlook was balanced 12 months ago.  As we see it, the US economy is slowing down somewhat, and there is a good case for the Fed to gradually make monetary policy less restrictive. However, unemployment is low, and the bank is not in a hurry, and our main scenario is for them to wait and see what happens politically also at the May meeting before cutting in June.

In Europe, the German parliament as expected passed the large fiscal spending bill of the incoming government before the old parliament is dissolved and the new one takes over next week. Many interesting and potentially market moving decisions remain though, as the plan must be implemented and the new government formed.

Like the Fed, the Bank of England kept rates unchanged while signalling that it still sees room for cuts later. The Swedish Riksbank also held steady but here, the signals are not for more cuts, see also page 3. The Swiss national bank did cut rates amid the very low inflation there, and as widely expected the Bank of Japan did not change rates this time but given the renewed vitality in the economy, we see a strong case for more rate hikes in the future.

China published data for January and February (at the same time because of the Chinese New Year holiday), with upside surprises in retail sales and home sales, but continued decline in house prices. It is a strong priority for the government to get consumer spending going, and stabilisation in the housing market is seen as a precondition for that. This week, the State Council presented a plan to 'vigorously boost' consumer spending. If successful, that would also have implications for global goods demand.

The ECB has stated that incoming data will determine whether rates are cut in April, and one of the crucial data points in that regard is likely to be the March PMIs out on Monday. The growth picture has improved somewhat this year, and we expect that to continue driven by manufacturing, despite the great uncertainty. We also get the first March inflation numbers (for France and Spain) on Friday.

The US data calendar for the coming week is fairly light, with the Conference Board's consumer confidence on Tuesday as a potential highlight. In the UK, Chancellor Reeves will present the Spring Statement where the Labour government faces some tough choices in meeting its fiscal objective while aiming to improve the UK economy's growth prospects.

Full report in PDF.

Markets

Markets build on recent momentum today in absence of eco data of any significance on both sides of the Atlantic. European stock markets correct a second session straight up and over 1% (underwhelming outcome EU Summit?!) with opening losses of similar magnitude in the US. Disappointing earnings by the likes of FedEx and Nike add to stalling US growth fears. Core bonds advance with US Treasuries slightly outperforming German Bunds. The front end of the curve outperforms with yields changes in the US varying between -1.8 bps (30-yr) to -4.5 bps (2-yr). We don’t believe this is a lasting comeback of core bonds in light of this week’s developments. Central bankers around the globe sent a clear signal that upside inflation risks outweigh downside growth risks, going from the Fed’s updated Summary of Economic Projections, over the BoE’s more hawkish 8-1 status quo vote or the Riksbank end to the cutting cycle to BoC governor Macklem just spelling it out-loud and the Brazilian central bank taking its policy rate beyond the post-Covid peak. Inflation is here to stay with inflation expectations becoming at risk of being de-anchored. “Transitory” is how Fed chair Powell labelled the inflationary impact from tariffs. Fool me once, shame on you; fool me twice shame on me. Markets won’t get fooled around this time. German Bund yields correct 1.9 bps (30-yr) to 4 bps (5-yr) lower with the German upper house as expected passing the spending package. Defense spending in excess of 1% of GDP will be exempt from borrowing restrictions, an off-budget infrastructure fund will be able to raise another €500bn over the next 12 years with €100bn earmarked for the Climate and Transition Fund and €100bn for regional projects and Germany’s states get room to borrow up to 0.35% of GDP instead of having to run balanced budgets. The US dollar recovers some ground, but gains remain technically insignificant. Recapturing the 104 area on a trade-weighted basis would be a first sign of some short term peace. Previous resistance near 1.08 is similarly the first reference for EUR/USD (currently changing hands at 1.0833).

Next week’s eco calendar looks promising with March PMI surveys immediately on Monday. Early March German confidence indicators suggest a significant improvement for European gauges linked to fiscal U-turn, while US indicators might show more of the recession fatigue. In Tuesday’s US consumer confidence, we especially eye the evolution of inflation expectations given the recent surge in this component (both short term and long term) in the Michigan survey. Wednesday is key for UK markets with February CPI numbers and UK Chancellor Reeves’ Spring Budget. On Thursday’s there’s a special reference to the US Congressional Budget Office’s 30-yr US budget outlook which risks becoming another red flag for (long term) US Treasuries with President Trump’s fiscal agenda and the higher interest rate climate set to significantly raise future budget deficits. US PCE deflators wrap things up on Friday after which we rapidly approach Tariff Day (April 2nd).

News & Views

Czech confidence data improved more than expected in March. The overall composite confidence indictor improved from 97.8 to 99.5, while a near stabilization was expected. The rise was supported by both a similar improvement in consumer sentiment (98.8 from 96.6) and in business confidence (99.6 from 98.0). CSO also analyzed that both the composite and the business indicator where higher compared to the same month last year. In the consumer survey, the share of consumers expecting the economic situation in the Czech Republic to deteriorate over the next twelve months decreased, but remained relatively high. The share of households expecting their financial situation to deteriorate also decreased slightly. Business confidence increased across all sectors. Compared with February, it increased the most in trade (+2.3 points), followed by selected services (+1.8 points), industry (+1.3 points) and construction (+1.1 points).

Belgian consumer confidence fell sharply in March, almost completely wiping out the increase in February. The indicator dropped from -4 to -10. The decline was due to rising pessimism over the general economic situation in Belgium (-35 from -24) and increased fears over unemployment (20 from 8), which had abated considerably last month. On a personal level, households’ expectations concerning their own financial situation remained unchanged. However, their savings intentions fell, after having risen by almost the same degree last month (17 from 20).

New York Fed President John Williams highlighted the elevated level of uncertainty facing the US economy. Speaking at a public event, Williams acknowledged that “it’s hard to know with any precision how the economy will evolve,” pointing to a wide range of potential scenarios shaped by fiscal and trade policy shifts, geopolitical risks, and other external developments.

Williams noted that both hard economic data and forward-looking indicators have been giving mixed signals. He added that the recent surge in policy uncertainty measures.

Despite the murky backdrop, he defended Fed’s current stance, describing the 4.25% to 4.5% policy rate range as “modestly restrictive” and “entirely appropriate.” With inflation still running slightly above target and labor markets remaining solid, there appears to be little urgency to shift course in the near term.

Chicago Fed President Austan Goolsbee struck a cautious but balanced tone in his latest remarks, saying Fed should "wait to see some of these things get cleared up" given the high degree of policy uncertainty.

Speaking to CNBC, he noted a shift in tone among business and civic leaders in recent weeks, highlighting growing "anxiety" and delayed capital spending decisions as companies weigh the impact of tariffs and other fiscal policy developments.

Despite the cautious near-term stance, Goolsbee reaffirmed his longer-term view that interest rates are likely to be lower 12 to 18 months from now.

While the Fed may not be in a rush to act immediately, he emphasized the importance of continued progress on inflation as a key condition for future easing.

Gold has been in an uptrend since the beginning of March, and the rally accelerated as gold hit new highs at the end of last week, when the spot price hit a new record of $3057. We see this breakout as the start of a new expansionary momentum with an upside potential of $3180/oz, which represents 161.8% of the upside momentum from the start of the year to the February peak.

The alternative view is also bullish. According to it, gold has completed a correction since the beginning of the year, following the rally from October 2023 to November 2024. The bulls are now targeting the level of $3400 an ounce. This seems like the bulls’ target for the coming months. However, we should not lose sight of the fact that the current rally in gold is accumulating extreme overbought conditions on both the daily and weekly timeframes.

This disposition leaves room for sharp rallies in the near term on a short squeeze, i.e. liquidation of short positions. However, the pause in growth may well be followed by a broad correction, which we will be sure to report on in the future.

Daily Pivots: (S1) 1.0806; (P) 1.0862; (R1) 1.0908; More...

No change in EUR/USD's outlook and intraday bias stays on the downside. Pull back from 1.0953 short term top would extend to 38.2% retracement of 1.0358 to 1.0953 at 1.0726. Strong support should be seen there to bring rebound. Meanwhile, break of 1.0953 will resume the rally from 1.0176 towards 1.1274 key resistance.

In the bigger picture, prior strong break of 55 W EMA (now at 1.0675) suggests that fall from 1.1274 (2024 high) has completed as a three wave correction to 1.0176. Rise from 0.9534 is still intact, and might be ready to resume. Decisive break of 1.1274 will target 100% projection of 0.9534 to 1.1274 from 1.0176 at 1.1916. Also, that will send EUR/USD through a multi-decade channel resistance will carries larger bullish implication. This will now be the favored case as long as 1.0531 resistance turned support holds.

Daily Pivots: (S1) 1.2930; (P) 1.2973; (R1) 1.3009; More...

No change in GBP/USD's outlook and intraday bias remains neutral. On the downside, firm break of 1.2910 support should confirm short term topping, on bearish divergence condition in 4H MACD. In this case, intraday bias will be back on the downside for near term channel support (now at 1.2780). On the upside, though, above 1.3013 will resume the rally from 1.2099 towards 1.3433 high.

In the bigger picture, up trend from 1.3051 (2022 low) is not completed. Resumption is expected after corrective pattern from 1.3433 completes. Next target will be 1.4248 key resistance. This will now remain the favored case as long as 1.2099 support holds.

Daily Pivots: (S1) 0.8768; (P) 0.8806; (R1) 0.8855; More…

Intraday bias in USD/CHF remains neutral as consolidations from 0.8757 is still extending. While stronger recovery cannot be ruled out, upside should be limited by 0.8911 support turned resistance. On the downside, break of 0.8757 will resume the fall from 0.9200 to 61.8% retracement of 0.8374 to 0.9200 at 0.8690. Sustained break there will pave the way back to 0.8374 support.

In the bigger picture, rejection by 0.9223 key resistance keep medium term outlook bearish. That is, larger fall from 1.0342 (2017 high) is not completed yet. Firm break of 0.8332 (2023 low) will confirm down trend resumption.

Retail sales declined by 0.6% month-on-month (m/m) in January, following December's outsized gain of 2.6% (previously reported as 2.5%). The result came in below the Statistics Canada's advanced estimate of 0.4%.

After adjusting for inflation, the volume of retail sales posted a sizeable decline of 1.1% m/m in January.

A big part of the weakness came from sales at motor vehicle and parts dealers, which dropped 2.6% m/m, reversing all of December's 1.8% gain. Ex-autos, sales rose 0.2% m/m, outperforming the consensus call for a 0.2% decline.

Receipts at gas stations and fuel vendors rose 3.2% m/m in nominal terms. This was largely due to higher prices, as volumes growth was negligible at just 0.1% m/m.

Excluding auto sales and receipts at gas stations, core retail sales declined 0.2% m/m in January. The weakness was driven primarily by a 2.5% drop in food and beverage stores.

Gains in other categories – furniture and home furnishings stores (+3.9% m/m), building material & garden equipment dealers (+1.6% m/m), health and personal care stores (+1.2% m/m), and general merchandise stores (+0.9% m/m) – were not enough to offset the losses.

E-commerce sales fell 0.9% m/m in January, following a 2.9% gain in December.

Statistics Canada's advanced estimate for February points to another decline in sales of 0.4% m/m.

Key Implications

Consumers tightened their belts to start the year with retail sales retreating more than expected in January after a strong showing in December. Since sales are reported in nominal terms, part of the decline may reflect a temporary drop in prices due to the HST/GST holiday. However, the pullback was even more pronounced in real terms.

Looking ahead, uncertainty looms. Our internal credit and debit card statistics points to a slight softening in spending through the first quarter, consistent with today's reading and the advance estimate for February. While there may be some stockpiling ahead of tariffs in March any boost would likely be short-lived. Consumers remain cautious and may restrain spending further until there is more clarity on the outlook for jobs, incomes and prices. We've penciled in a 2.7% (annualized) growth in consumer spending for Q1, and potentially a contraction in the following quarters (see QEF).

Daily Pivots: (S1) 148.32; (P) 148.64; (R1) 149.10; More...

Intraday bias in USD/JPY remains neutral and outlook is unchanged. Corrective pattern from 146.52 might extend. But in case of stronger recovery, upside should be limited by 150.92 support turned resistance. On the downside, firm break of 148.17 support will bring retest of 146.52 first. Sustained trading below 61.8% retracement of 139.57 to 158.86 at 146.32 will resume the fall from 158.86 to 139.57 support.

In the bigger picture, price actions from 161.94 are seen as a corrective pattern to rise from 102.58 (2021 low), with fall from 158.86 as the third leg. Strong support should be seen from 38.2% retracement of 102.58 to 161.94 at 139.26 to bring rebound. However, sustained break of 139.26 would open up deeper medium term decline to 61.8% retracement at 125.25.