Turning On the Fiscal Tap

• Germany unleashed a fiscal bazooka. EUR rally gets turbocharged. Bond yields across Europe surge led by Germany. China raised its 2025 fiscal deficit target and plans more bond issuances.
• Global stocks are rallying. Encouraging fiscal developments outweigh the drag to growth from trade war escalation. US President Donald Trump vowed yesterday to push ahead with tariffs.
• US growth concerns is weighing on USD and Treasury yields. ISM services index takes the spotlight today.

USD is under broad downside pressure on US growth concerns and encouraging fiscal developments in Europe. The Atlanta Fed Q1 GDPNow model is tracking at -2.8% SAAR, down from -1.5% on February 28. The model will be updated tomorrow.

Today, the US February ADP employment (1:15pm London) and ISM services (3:00pm London) will shed more light on the labor market and growth backdrop. ADP is expected at 140k vs. 183k in January and the ISM is projected at 52.5 vs. 52.8 in January. The regional Fed ISM services prints point to downside risk which could further undermine USD in the near-term. Of note, the S&P Global services PMI plunged to 49.7 vs. 52.9 in January, the first contraction in the services sector in 25 months.

EUROZONE

EUR/USD powered forward to its highest level since November 2024 and German 10-year government bond yields surged as much as 23bps to 2.72% as Germany unleashed a fiscal bazooka. It’s looking good for EUR/USD in the near-term. First, the US growth outlook is flashing yellow which is a drag for USD.

Second, Germany plans to turn on the fiscal tap, reducing the burden on the ECB to drive growth. Chancellor-in-waiting Friedrich Merz said yesterday his center-right CDU/CSU and the center-left Social Democrats (SPD) will next week jointly present a bill in parliament to set up a €500 billion fund (about 3.3% of Eurozone GDP) spread over ten years for infrastructure spending. The future coalition partners also plan to amend the constitution to exempt defense and security outlays from limits on fiscal spending.

Germany’s announcement comes on the heels of yesterday’s pledge by EU President Ursula von der Leyen’s that “Europe is ready to massively boost its defense spending.” Von der Leyen proposed extending €150 billion in loans to boost defense spending and activate a mechanism allowing countries to spend an additional €650 billion on defense over four years without triggering budgetary penalties.

Third, the ECB will likely remove reference that monetary policy remains restrictive in its statement tomorrow because the policy rate is getting close to neutral rate territory. ECB staff estimate the neutral rate at 1.75%-2.25%. Scrapping the restrictive reference would signal limited scope to ease policy more than is currently priced-in and offer EUR support.

SWITZERLAND

USD/CHF plunged to its lowest level since December 12. Switzerland’s February CPI print suggests the Swiss National Bank’s (SNB) can afford to pause its easing cycle at its next March 20 meeting. Headline CPI was a tick higher than expected at 0.3% y/y vs. 0.4% in January but is tracking the SNB’s Q1 forecast of 0.3% y/y. Core CPI was unchanged for a second consecutive month at 0.9% y/y (consensus: 0.7%). Markets continue to almost fully price-in a 25bps cut in March. We doubt the SNB will deliver more cuts in the near-term and see additional upside potential for CHF.

JAPAN

USD/JPY is holding under 150.00. Bank of Japan (BOJ) Deputy Governor Shinichi Uchida stuck to the script. Uchida signaled that the BOJ would continue to raise the policy interest rate if the economic outlook is realized. Uchida added that it's unlikely the bank would raise rates at back-to-back meetings. Markets price-in the next 25bps hike to 0.75% in June and a terminal policy rate between 1% and 1.25% over the next three years. A gradual BOJ normalization cycle limits JPY upside.

AUSTRALIA

AUD/USD is firmer on USD weakness. Australia’s Q4 real GDP matched consensus. The economy grew 0.6% q/q vs. 0.3% in Q3. Both public and private expenditure contributed to the growth, supported by an increase in exports of goods and services. On an annual basis, real GDP was up 1.3% in Q4 slightly above the RBA’s 1.1% forecast. The RBA projects growth to return to its trend rate of 2% over 2025.

RBA remains cautious which offers AUD support. Deputy Governor Andrew Hauser reiterated overnight that “the Board does not currently share the market’s confidence that a sequence of further cuts will be required.” Interest rate futures imply almost 75bps of easing in the next 12 months with the next 25bps cut priced-in for May as heightened trade tensions weighs on the global economic outlook.

NEW ZEALAND

RBNZ Governor Adrian Orr unexpectedly resigned. Deputy Governor Christian Hawkesby will be Acting Governor until March 31. From April 1 the Minister of Finance, on recommendation from the RBNZ Board, will appoint a temporary Governor for a period of up to six months.

Orr’s sudden departure was a personal decision according to RBNZ Chair Neil Quigley and has no material policy implications. The RBNZ has penciled-in another 75bps of easing over the next 12 months that would see the policy rate bottom at 3.00%. This seems about right and is in line with swaps market pricing.

CHINA

USD/CNH is consolidating near recent lows around 7.2600. China boosts fiscal spending. In line with consensus, China raised its 2025 fiscal deficit target to the highest in over three decades to around 4% of GDP vs. 3% of GDP in 2024 and left its 2025 GDP growth target unchanged at around 5%.

As part of the plan, China will sell 1.3 trillion yuan worth of special sovereign bonds vs. 1.0 trillion in 2024. The extra 300 billion yuan for 2025 will be used to finance a subsidy program for residents’ purchases of consumer goods, double the amount from 2024. China also announced 4.4 trillion yuan in local government special bonds for infrastructure and other public investments. This up from 4 yuan trillion in 2024.

China reiterated its vague pledge to “vigorously” boost consumption by increasing income and strengthening the social security system. But did not offer specific details. Rebalancing the economy away from investment toward domestic consumption has been an explicit goal of China since the December 2004 Central Economic Work Conference. However, three major structural constraints have prevented any meaningful effort to boost the role consumption plays in the economy: low household income levels, high precautionary savings, and high levels of household debt.