There is increased optimism in Europe after UK PM Starmer hosted European leaders at the weekend in a bid to support Ukraine. The UK and France said they would lead a European effort to forge a peace plan to present to President Trump. There was discussion of taking more responsibility for funding Europe’s defence. French President Macron proposed a one-month ceasefire “in the air, sea and on energy infrastructure”, but the word is that Europeans do not agree with this plan.
President Trump is still smarting after the train-wreck end to his public sit-down with Ukraine’s President Zelenskyy, posting “this is the worst statement that could have been made…and America will not put up with it for much longer”, attaching a media report quoting “Ukraine’s Zelenskyy says end of war with Russia is ‘very, very far away’”.
European equities had a strong day, with the Euro Stoxx 600 index up 1.1%, fuelled by further gains in the “aerospace and defence” sector, up nearly 8%. By contrast, US equities show a modest fall after the strong end to last week. European currencies have outperformed, with both EUR and GBP up over 1% from last week’s close to nearly 1.05 and just over 1.27 respectively. NZD/EUR traded at a five-year low around 0.5355 and NZD/GBP traded at a fresh nine-year low around 0.4420.
In economic news, the US ISM manufacturing survey was disappointing in that the direction of travel was towards stagflation. The headline index fell less than a point to 50.3, but this was propped up by a 3.6pt jump in supplier delivery times, possibly reflecting a rush of activity ahead of imminent tariffs. The underbelly of the survey was weaker, with new orders plunging 6.5pts to 48.6 and employment down 2.7pts to 47.6. On the inflation side, the prices paid index jumped 7.5pts to 62.4, its highest level since mid-2022. Industry comments noted the incoming tariffs as a source of uncertainty and price pressures.
Euro area CPI inflation in February fell by one-tenth to 2.4% for the headline measure and 2.6% for the core measure, but both were one-tenth higher than expected. Of note, services inflation fell to 3.7%, after being sticky near the 4% mark for over a year, and higher than that earlier, which will provide some comfort to the ECB that domestic inflation pressures are moving in the right direction.
The ISM survey supported US Treasuries, with the 10-year rate falling to a low of 4.18% after earlier trading as high as 4.26% overnight. It currently sits at 4.19%, down 4bps from the NZ close. By contrast, European rates were higher, fuelled by the small miss on inflation and the outlook for much higher defence spending across the region, which will add to fiscal deficits. Germany’s 10-year rate rose 8bps to 2.49%.
Higher European yields versus the US is one factor supporting the noted lift in the EUR. However, the USD is broadly weaker, with the DXY index down 1% and USD indices with a much lower weight to the EUR are down around 0.6%. Against this backdrop, the NZD has recovered some of last week’s hefty loss and is up 0.7% from last week’s close to 0.5635. The AUD has risen by a similar amount, to around 0.6250. NZD/AUD is flat at 0.9020. While the NZD is weaker on European crosses, as noted, it has made modest gains against CAD and JPY.
There has been no fresh news on US import tariffs, with the proposed 25% rates on Canada and Mexico, apart from a reduced 10% rate on Canadian energy products, still due to take effect 4 March (tomorrow, NZ time). And China will face an added 10% tariff rate as well, on top of the extra 10% imposed last month. The Global Times reported yesterday “China is studying and formulating relevant countermeasures in response to the US’ threat of imposing an additional 10 percent tariff on Chinese products…the countermeasures will likely include both tariffs and a series of non-tariff measures, and US agricultural and food products will most likely be listed”.
In the domestic rates market, there was further widening in rates between bonds and swaps, with NZGB yields up 1-3bps across the curve, with the 10-year rate up 2bps to 4.52%. The 10-year swap rate rose 1bp to 4.07% while the 2-year rate fell 1bp to 3.42%. NZ data showed a strong 3.1% lift in NZ’s terms of trade in Q4, continuing their strong recovery in the face of higher commodity export prices. The export/import volume data were friendly to our GDP estimates, suggesting some small upside risk to our current 0.2% q/q pick.
In the day ahead, NZ building consents are released, followed by Australian current account data, retail sales and the minutes of the February RBA meeting, when the Bank kicked started the easing cycle. The calendar is light tonight.
