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. 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.
