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Key insights from the week that was.

In Australia, GDP printed broadly as expected in Q4 2024, rising 0.6%qtr to be up 1.3% over the year. On a per capita basis, GDP rose for the first time in two years, albeit by just 0.1%, ending the longest run of consecutive declines on record. While both public and private demand rose in the quarter, new public demand continues to do most of the heavy lifting, reaching a new record share of the economy.

Overall, the recovery in private demand is starting to unfold gradually, with household consumption lifting 0.4% in the quarter to be up just 0.7% over the year. Improved growth in real disposable income is an important driver of this trend, principally thanks to decelerating inflation. As foreshadowed by the Westpac Consumer Panel, the boost to incomes from the ‘Stage 3’ tax cuts looks to have largely been put aside to rebuild savings buffers. This could lay a foundation for stronger consumer demand later in 2025. But if the precautionary mindset persists, downside risks for consumption are likely to grow. The latest data on retail sales subsequently pointed to a modest gain in January; today’s household spending indicator was close to expectations at 0.4% though the previous month was marked down from 0.4% to 0.2%.

A surprise in the national accounts worthy of close scrutiny is the rise in unit labour costs reported for Q4, the consequence of a step-up in wage growth and declining productivity. Crucial to the significance of this outcome is the sectoral composition. Interestingly, today’s labour account revealed that labour productivity deteriorated across both market and non-market sectors. In this week’s essay, Chief Economist Luci Ellis considers the downside risks for inflation and growth with reference to Australia’s economic experience during the late 2010’s.

Before moving offshore, a final note on housing. February’s CoreLogic data reported a 0.3% lift in house prices across Australia, a post rate-cut bounce consistent with historical patterns. Both the breadth and persistence of this turnaround over coming months will be of great interest, especially given the stretched starting point for affordability. Supply remains a crucial factor for the longer-term outlook; encouragingly, the firming uptrend in dwelling approvals is coinciding with tentative evidence of easing supply constraints for construction, reducing risks for the pipeline. For more detail on our views around the housing market, see our latest Housing Pulse on Westpac IQ.

Offshore, the focus was again on the US as President Trump’s tariffs on Canada and Mexico were imposed and then deferred (again). Eventually it was made clear that goods covered by the USMCA would be exempted for now, materially reducing the immediate effect of the tariffs, especially for key US manufacturers such as the auto industry and farmers who import fertiliser. Still President Trump was clear that this is a short-term deal, and that these tariffs along with the industry specific measures would come into full effect April 2.

The uncertainty being created by US trade policy is becoming evident with US consumer confidence hit in the most recent readings and personal consumption disappointing in January – down 0.2% on a nominal basis and 0.5% for real sales volumes despite a stronger-than-expected rise in personal income of 0.9%. Financial markets are also becoming increasingly concerned over the potential ill effects of tariffs on the US economy, the US dollar sharply lower over the week from almost 108 last Friday to 104 today on a DXY basis. An aside, Australian exporters look to be getting ahead of the building tariff risk, our trade surplus jumping higher to $5.6bn in January as exports to the US soared, albeit at the expense of shipments elsewhere.

US business surveys are yet to show a definitive effect however, the ISM services index edging higher in February from 52.8 to 53.5 while the ISM manufacturing PMI reported a modest decline from 50.9 to 50.3. The prices paid component for manufacturing shows tariffs are front of mind however, the index surging 7.5 points to 62.4, the highest level since mid-2022. The manufacturing employment index is worth keeping an eye on, having fallen to a contractionary 47.6 in February; though for aggregate employment, services is the dominant sector and remains in robust shape, its employment index at 53.9.

Across the Atlantic, downside risks were also front of mind for the ECB who cut its key rates by 25bps, bringing the deposit rate to 2.50%. GDP growth was revised down by 0.2ppt for 2025 and 2026 to 0.9% and 1.2%, a revision attributed to weakness in exports and firms holding back on investment decisions in the face of uncertainty. We expect three more cuts in coming months bringing policy to a neutral stance, with the ECB likely to remain cautious of downside risks to activity thereafter.

While Canada and Mexico received a short-term reprieve from the US on tariffs this week, China did not. Nonetheless, Chinese Premier Li Qiang's address to China's 2025 National People's Congress struck a very confident tone. Manufacturing investment and technological development remain priorities, but the need to bolster the housing sector, employment and consumer confidence is also front of mind. Fiscal support will be increased in 2025, and authorities are ready to provide additional support if downside risks crystalise. All told, authorities expect to repeat 2024 and grow the economy by another 5.0% in 2025 in fair or stormy weather.

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.

Daily Pivots: (S1) 189.50; (P) 191.03; (R1) 192.16; More...

Intraday bias in GBP/JPY remains neutral for now, as range trading continues. On the upside, firm break of 193.04 will resume the rebound from 187.04 to 194.73 resistance, and then 198.94. On the downside, firm break of 187.04 will extend the fall from 199.79 towards 180.00 support. Overall, corrective pattern from 180.00 might still be extending.

In the bigger picture, price actions from 208.09 are seen as a correction to rally from 123.94 (2020 low). Strong support should be seen from 38.2% retracement of 123.94 to 208.09 at 175.94 to contain downside. However, sustained break of 152.11 will bring deeper fall even still as a correction.

Daily Pivots: (S1) 158.73; (P) 160.01; (R1) 160.88; More...

EUR/JPY retreated after hitting 161.25 and intraday bias is turned neutral again. Rise from 154.77 is seen as another rising leg in the corrective pattern from 154.40. Strong break of 161.17 resistance will affirm this case and target 164.89 resistance next.

In the bigger picture, price actions from 175.41 are seen as correction to rally from 114.42 (2020 low). Strong support should be seen from 38.2% retracement of 114.42 to 175.41 at 152.11 to contain downside. However, sustained break of 152.11 will bring deeper fall even still as a correction. Next target will be 100% projection of 175.41 to 154.40 from 166.67 at 145.66.

Daily Pivots: (S1) 0.8351; (P) 0.8381; (R1) 0.8402; More...

EUR/GBP lost momentum after hitting 0.8410 and intraday bias is turned neutral first. Downside of retreat should be contained above 55 4H EMA (now at 0.8314). Rise from 0.8239 is seen as the third leg of the pattern from 0.8221. Above 0.8410 will target 0.8472 resistance next.

In the bigger picture, EUR/GBP is still bounded inside medium term falling channel. While rebound from 0.8221 might extend higher, it could still develop into a corrective pattern. Overall outlook will be neutral at best and down trend from 0.9267 (2022 high) could extend, at least until decisive break of channel resistance (now at 0.8511).

Daily Pivots: (S1) 1.6944; (P) 1.7019; (R1) 1.7106; More...

There is no sign of topping in EUR/AUD yet and intraday bias stays on the upside. Sustained break of 100% projection of 1.5963 to 1.6800 from 1.6355 at 1.7192 will confirm larger up trend resumption, and target 161.8% projection at 1.7709 next. On the downside, below 1.6990 minor support will turn intraday bias neutral first.

In the bigger picture, up trend from 1.4281 (2022 low) is still in progress. Firm break of 1.7180 (2024 high) will confirm resumption. Next target is 61.8% retracement of 1.9799 (2020 high) to 1.4281 at 1.7897. For now, outlook will stay bullish as long as 1.6355 support holds, even in case of deep pullback.

Daily Pivots: (S1) 0.9484; (P) 0.9560; (R1) 0.9605; More....

EUR/CHF retreated ahead of 100% projection of 0.8204 to 0.9516 from 0.9331 at 0.9643 and intraday bias is turned neural for some consolidations. Further rally is expected as long as 0.9516 resistance turned support holds. ON the upside, firm break of 0.9634 will target 0.9928 key structural resistance. However, sustained trading below 0.9516 will mix up the outlook and turn focus back to 0.9331 support.

In the bigger picture, the strong break of 55 W EMA (now at 0.9484) is a medium term bullish sign. Sustained break trading above long-term falling channel resistance (at around 0.9620) would suggest that the downtrend from 1.2004 (2018 high) has finally bottomed at 0.9204. Further break of 0.9928 will solidify this bullish case, and bring stronger medium term rise even still as a corrective move.

Donald Trump paused tariffs imposed on Canadian and Mexican imports two days after imposing 25% levies on its biggest trade partners’ products amid sanguine market reaction and resistance from trade partners. Beyond the politicians who refused to surrender, Walmart’s Chinese suppliers reportedly refused to take on a 10% price cut on their products while Europe is looking to replace Elon Musk’s Starlink in Ukraine by a European alternative, the French satellite operator Eutelsat, to make sure not to give the communication capabilities into the hands of a no-ally-anymore. Eutelsat’s stock price gained more than 500% in just a week. The European defense stocks consolidate gains near ATH levels as the European countries agreed to spend EUR 800bn for strengthening their defense and security – matching the amount Mario Draghi had suggested around last September to improve the continent’s tech, defense and green transition. On top, the European Central Bank (ECB) delivered another 25bp cut at yesterday’s meeting, as expected, but hinted that the rate cutting cycle could gently be coming to an end after six rate cuts as inflation is approaching their 2% policy target. Interestingly, the bank’s latest inflation and growth forecasts didn’t include the impact of the upcoming massive government spending – which should be balanced out by stricter-than-otherwise monetary policy to keep the price stability in check. The EURUSD advanced past the 61.8% Fibonacci retracement on the Trump selloff. The pair is now in a bullish trend with support to the latest rebound seen at 1.0725, the 200-DMA, 1.0678 - the minor 23.6% retracement and 1.0593 - the major 38.2% retracement above which the bullish trend will remain in play. On the equities front, the Stoxx 600 index closed yesterday near flat.

Across the Atlantic

Major US indices extended losses. The S&P500 lost 1.78%, tipped a toe below the 200-DMA and closed near this level, while the tech-heavy Nasdaq 100 slipped and closed below its own 200-DMA.. Is it a coincidence that Trump rolled back tariffs when the two major indices fell below their 200-DMA? Either way, the S&P500 is the worse performer among the world indices since his inauguration. Inside the US, the low volatility stocks amass capital, like Invesco’s QQLV ETF which includes names as Coca-Cola, Mondelez and AstraZeneca. The US dollar is on course for the biggest weekly drop in two years. The latest revision to Atlanta Fed’s GDPNow points at a 2.4% contraction in the US economy in Q1, and the recession bets are rising by the day. Polymarket now assigns a nearly 40% chance of a US recession this year, up from below 20% before Trump took office. Meanwhile, the Federal Reserve (Fed) is expected to cut rates more than previously expected to support the economy—as long as inflation allows. Will inflation allow? It’ll depend on tariffs.

Anyway, this morning, the market mood is a little bit better for the US equity futures. Broadcom jumped nearly 13% in the afterhours trading after announcing better-than-expected quarterly results and after giving a strong forecast. The announcement couldn’t come at a better time. The company’s stock price retreated to the 200-DMA yesterday on the back of a broad-based risk selloff that also pulled Nvidia to the lowest levels since September.

In China, Alibaba extended gains this week on claims that its new QwQ-32B model performs better than DeepSeek with less data. JD.com posted the biggest revenue growth in almost 3 years. And China announced the creation of a new bond platform to help the tech firms to issue onshore debt in a move to facilitate these firms access to capital. The CSI 300 is preparing the close the week on a positive note despite the tariff jitters.
Jobs day

Investors will be closely watching the US jobs data this Friday. The data is expected to print 159K new nonfarm job additions in February, with slowing wages growth on a monthly basis and a stable unemployment rate at 4%. But the risks are tilted to the downside due to the mass firing at the federal agencies and their implications for the broader economy. A set of softer-than-expected jobs figures could further weigh on the US dollar, while the worse-case-scenario for the markets would be a lower-than-expected NFP print combined with higher-than-expected wages growth – a combination that would leave the Fed facing a slowing economy with limited room to give support.

In focus today

In the euro area, we receive the final national accounts data for Q4, where attention will centre around the first release on hours worked and private consumption.

In the US, focus turns to the February Jobs Report. We forecast NFP growth to slow down to +120k (Jan. +143k) due to negative seasonality, federal layoffs and slowing immigration constraining the growth of labour supply.

In Denmark, January's industrial production figures are due, following a 4% increase in December, resulting in 8.6% annual growth in 2024. Unlike the broader European trend, Danish manufacturing remains strong, even excluding pharmaceuticals.

In Norway, January's manufacturing production figures are released. After a significant drop following the summer of last year, we experienced a sharp correction on the upside in December. Relatively weak leading indicators, such as the PMI and the Confidence indicator, mean that this may look like noise. The January figures will therefore provide us with important information on whether we will see a lift in activity into 2025 or if the leading indicators are correct.

In Sweden, the market will continue to digest the implications of the second consecutive monthly upside surprise to inflation which has lifted both CPIF and CPIF excl. Energy way above Riksbank's forecasts. This morning, the Debt Office releases the February borrowing requirement. So far, DO borrowing has been close to SEK 18bn higher than forecast in the November outlook.

China releases CPI for February on Sunday which is expected by consensus to drop to -0.4% y/y from 0.5% y/y in January. It will likely create some deflation headlines, but it is mostly due to effects from the Chinese New Year, which lifted some prices in January that then fall back in February again. Still no doubt, price pressures are still low in China. PPI is expected to stay in deflation with a drop of 2.1% in February from -2.3% in January.

Economic and market news

What happened yesterday

In the euro area, the ECB lowered its monetary policy rate by 25bp from 2.75% to 2.50%, as expected. Market focus is now on future meetings, with some ECB members expressing doubts about further rate cuts. The key here is the central bank's statement suggesting monetary policy is less restrictive, hinting that the end of rate cuts may be near, but uncertainty remains due to geopolitical tensions and economic factors. Inflation trends downwards, but low inflation could still be a concern. We expect the ECB to continue rate cuts at every meeting until September, lowering the rate to 1.5%, which is below market expectations. However, uncertainty has increased in the light of fiscal policy uncertainty in Europe.

In the US, initial jobless claims data fell -21k to 221k in March, thus coming in well below market expectation. Recurring claims rose 42k to 1.897m in the same period, close to expectation. This indicates that the US continues to host a relatively tight labour market.

In China, imports surprised to the downside, shrinking 8.4% in February, well below market expectations of an increase of 1%. Exports grew 2.3%, also below market expectation of 5.0%. The numbers reflect escalating trade tensions with the US as well as subdued activity during the Lunar New Year festival.

In Sweden, the topside surprise for flash CPIF ex energy (3.0% vs consensus, DB 2.7% and RB 2.4%), sent EUR/SEK further below the previous support area around 11.00. The market is increasingly drawing the conclusion that the Swedish easing cycle is over and done. That said, the main drivers for the krona recently are related to geopolitical events and potential US-EU rotation flows alongside US-Europe rates convergence, which we have discussed extensively in recent Reading the Markets Sweden. In all, it is hard to argue that the larger-than-anticipated SEK recovery vs the USD (and the EUR) is not aligned with the recent shift in fundamentals.

In Denmark, February's bankruptcy statistics showed an 8.8% decrease in bankruptcies compared to January. This corresponds to a decrease of 0.8% m/m in the 12-month moving average. The number of bankruptcies today is on par with the levels we saw in the years leading up to the pandemic, thus not ringing the alarm bells. Furthermore, following ECB's rate cut, Nationalbanken cut its key rate by 25bp bringing it to 2.10%, thereby keeping the yield spread fixed.

In geopolitics, President Trump has temporarily delayed import tariffs for all USMCA-compliant goods for Canada and Mexico under a new North American trade pact. The exemption is effective until 2 April. Earlier announced import tariffs of 25% on steel and aluminium are still scheduled to take effect on 12 March. On another note, Russia has warned French President Emmanuel Macron against using nuclear rhetoric and rejected European proposals to send NATO peacekeepers to Ukraine, viewing them as confrontational.

Equities: Global equities declined yesterday, led by the US, while Europe posted gains. This trend is familiar, as Europe has consistently outperformed the US year to date, a fact now widely acknowledged. However, there is more to this narrative. At least three significant forces are at play, and this does not include the ECB, who's meeting yesterday was uneventful. The focus is on US and European politics, which are moving in opposite directions. Investor confidence in politicians is shifting from the US to Europe - a trend that has just begun and may continue for some time. Furthermore, the macroeconomic environment remains stable, prompting investors to consider whether US politics will alter this situation. This has been the primary question for the past two weeks and will remain so in the coming period.

While headline figures for major equities highlight the current disparity between the US and Europe, the movements within underlying sectors reveal a more complex picture. In Europe, cyclical stocks are advancing, while defensives are declining, with industrial-related sectors outperforming due to anticipated infrastructure spending. Banks are significantly outperforming REITs with the two sectors find themselves at opposite ends of the performance spectrum, driven by the substantial rise in yields, which benefits banks but adversely affects REITs.

Conversely, in the US, defensives outperformed cyclicals by 2% yesterday and nearly 9% over the last month. Despite the perception that US equities are plummeting, it is important to note that defensive stocks have gained over the past month. This reflects the uncertainty associated with Trump's political approach and the fact that the macroeconomic environment has not deteriorated drastically. If the macroeconomic situation were truly weak, defensives would also be selling off. In the US yesterday, the Dow was down 0.99%, the S&P 500 fell by 1.8%, the Nasdaq declined by 2.6%, and the Russell 2000 decreased by 1.6%. This morning in Asia, the European/US dynamic described could be applied to Asia as well. Although the politics differ in form, goals, and intentions, the outcomes and conclusions regarding the starting point and potential for growth remains and equity markets the same. Consequently, Chinese and China-related equities are higher this morning, while Japanese equities are under pressure from the strong yen. European futures are lower this morning, aligning with the US movements after the European cash close yesterday. Meanwhile, US futures are higher.

FI: Rates markets recorded yet another volatile session yesterday, after the brutal sell-off on Wednesday. 10y Bunds touched above 2.9% in the morning but ended the day at 2.83% after a "last minute rally", which was just a couple of bp higher than Thursday's close. The ECB meeting yesterday was slightly more hawkish than expected, leaving all options for April, where we do not identify a preferred option at this stage. Markets are pricing 12bp for the April meeting and 44bp seen through the end of the year. Markets have repriced the terminal rate 20bp higher this week.

FX: EUR/USD has largely stabilized around the 1.08 mark following this week's rally, driven by the seismic shift in fiscal spending in the euro area. As expected, the ECB meeting had a limited impact after the widely anticipated 25bp rate cut. The topside surprise to Swedish inflation sent EUR/SEK further below the previous support area around 11.00. EUR/CHF erased some of Wednesday's significant gains alongside USD/JPY breaking back below 148. GBP continues to struggle in an environment characterised by elevated uncertainty and high volatility.

Daily Pivots: (S1) 1.4230; (P) 1.4303; (R1) 1.4368; More...

Intraday bias in USD/CAD remains mildly on the downside for the moment. Fall from 1.4541 is seen as the third leg of the corrective pattern from 1.4791. Deeper decline would be seen to 1.4150 low next. On the upside, though, above 1.4541 will resume the rebound from 1.4150 to retest 1.4791 high.

In the bigger picture, long term up trend is tentatively seen as resuming with prior breach of 1.4667/89 key resistance zone (2020/2015 highs). Next target is 100% projection of 1.2401 to 1.3976 from 1.3418 at 1.4993. This will remain the favored case as long as 1.3976 resistance turned support holds (2022 high), even in case of deep pullback.