Economic Clouds Gather
- Concerns over the US growth outlook has turbocharged the rally in Treasuries. USD is mixed near recent lows. We get another consumer confidence read today.
- Germany's chancellor-in-waiting Friedrich Merz is wasting no time to try and boost fiscal spending. This is EUR supportive.
- PBOC kept its 1-year medium-term lending facility rate on hold at 2% (expected). Bank of Korea delivers a 25bps cut to 2.75% (expected). National Bank of Hungary is widely expected to keep rates steady at 6.50% today.
USD is mixed just above recent lows. 2 and 10-year Treasury yields plunged to near ten-week lows and US equity markets are under downside pressure on concerns over the US growth outlook.
Red flags are emerging for the US economy. Private sector activity came close to stalling in February as the composite PMI plunged to a 17-month low at 50.4, retail sales contracted sharply in January and inflation pressures are picking-up. Another month or two of poor US economic data would deliver a blow to the US exceptionalism narrative and is a downside risk for USD.
Today, the US February Conference Board consumer confidence index takes the spotlight (3:00pm London). The report will likely validate the poor final February read of the University of Michigan sentiment index. The Conference Board headline index is expected at 102.5 vs. 104.1 in January and would remain within the same narrow range that’s held throughout the past two years. Watch-out for the labor index (jobs plentiful minus jobs hard to get). In January, that index fell to a five-month low at 16.2, suggesting consumers are less optimistic about future labor market conditions.
Fed speakers today include: Dallas Fed President Lorie Logan (2026 FOMC voter) (9:20am London), Fed Vice Chair for Supervision Michael Barr (4:45pm London), and Richmond Fed President Tom Barkin gives speech titled “Inflation Then and Now” (non-FOMC voter) (6:00pm London).
EUROZONE
Germany's chancellor-in-waiting Friedrich Merz is wasting no time to try and boost fiscal spending. Merz is looking at using the outgoing parliament, which can convene until March 24, to lift the country’s debt brake and approve up to €200 billion in special defense spending. It will be easier to push through fiscal reforms in the current parliament, as the next parliament may not have the necessary two-thirds majority to make constitutional changes.
Political development in Germany is EUR supportive. However, the prospect of more ECB easing is an ongoing drag for EUR. The Eurozone disinflationary process is well on track and the ECB has scope to deliver on rate cut expectations. Interest rate futures imply 86bps of ECB easing over next 12 months and the policy rate to bottom under 2.00%.
The Eurozone negotiated wages indicator for Q4 is the domestic highlight (10:00am London). In Q3, the negotiated wages indicator surged to a series high of 5.42% y/y in Q3 vs. 3.54% in Q2 on faster German pay growth. Nevertheless, the ECB’s forward-looking wage tracker points to a sharp easing in Eurozone wage pressures. The wage tracker with unsmoothed one-off payments (like the one used for the ECB’s indicator of negotiated wage growth) indicates an average negotiated wage growth of 4.8% y/y in 2024, which eases to 2.7% y/y in Q4 2025.
CHINA
As was widely expected, the People’s Bank of China (PBOC) left its 1-year medium-term lending facility (MLF) rate steady at 2.0%. More easing is in the pipeline as China’s economy is still struggling to escape a deflationary spiral. However, the growth outlook will remain unimpressive as long as policymakers fail to address the root cause of weak consumption spending activity: low household income levels, high precautionary savings, and high levels of household debt.
China’s annual “Two Sessions” National People's Congress meeting begins March 5. While detailed policy announcements are not expected, the sessions provide a valuable insight into the government’s fiscal and growth objectives.
SOUTH KOREA
USD/KRW firmed up slightly after testing yesterday its lowest level since early December. As was widely expected, Bank of Korea (BOK) cut the policy rate 25bps to 2.75%. Governor Rhee confirmed that today’s rate cut decision was unanimous and suggested more easing is in the pipeline. Rhee noted that market view of two to three cuts this year, including today’s cut, is not much different from the central bank’s assumption. Rhee added that while all 6 board members agree that the bank is in rate cut cycle, over the next three months 2 board members are open to further rate cuts and the rest see rates on hold.
HUNGARY
National Bank of Hungary meets today and is widely expected to keep rates steady at 6.50% (1:00pm London). At the last January 28 meeting, the bank kept rates at 6.50% for the fourth straight month and the updated policy guidance suggested the bar for additional rate cuts is high. The central bank warned that “risks to the outlook for inflation warrant the maintenance of tight monetary conditions.” Indeed, headline and core CPI inflation rose further above the bank’s 2% to 4% tolerance band in January. Despite the bank’s hawkish guidance, the swaps market is still pricing in 50% odds of a 25bps cut over the next three months.
