Euro holds gains
The euro staged a comeback last week after Germany’s new chancellor-elect announced plans for a €500bn infrastructure fund (to be used over the next 10-years) and a relaxation of the country’s “debt brake” to allow for increased defence spending. Increased government spending on infrastructure and defence across euro-zone members may now be in prospect and boost moribund growth rates in the years ahead. The single currency has strengthened to over $1.08 against the dollar by Friday, its best level since the days following the election of President Trump in November, and up from $1.04 at the start of last week. On Friday, the euro gained to over $1.0850 for time but starts off trading this morning at around $1.0820. Against sterling, the euro has also risen and start off today at close to 84p (from 82.5p last Monday).
The flip side of more spending is the likelihood of more debt and looser public finances so there was a sizable upward swing in German bond yields. 10 year bund yields rose by close to 35bps for the week taking them to over 2.8%. Other Euro Area countries bond yields rose too, with French yields up around 35bps as well to 3.55%. Moves in UK yields were more sedate, up about 8bps to over 4.6% and US yields were up 15bps to 4.3%.
Friday’s US payrolls data for February was just slightly behind the consensus forecast with 151k new jobs against a forecast of 160k. However the detail was less encouraging with downward revisions to job figures in the previous three months while the unemployment rate unexpectedly ticked up to 4.1% from 4.0%. President Trump’s hiring freeze showed in up federal employment falling 10k last month but the real impact of government spending cuts and their spillover effects is more likely to start to properly kick in from March. The softer employment data adds to recent data showing weakness in consumer and business confidence in the US and, amid tariff threats and uncertainty. the very real chance of a slowdown in US economic activity.
That uncertainty is also playing havoc with US equities which are enduring a torrid time of late. The S&P 500 did manage a gain of 0.5% on Friday to close out the week, but that still left it down more than 3% for the week, and the index is lower now than it was when President Trump took office in January, despite the initial boost to share prices in the days that followed. The reverse is true for European equities with the Eurostoxx down 0.9% on Friday but more or less unchanged for the week and up around 6% in that same time since Trump took office.
In Germany, industrial production rose 2.0% month-on-month in January. The manufacturing sector in Germany has struggled over the past year or more, and output is still down 1.6% year-on-year, but this is a welcome sign the sector is improving. The increase last month was driven mainly by an increase in car production. The outlook for the sector has also improved with the new government planning to boost spending on infrastructure which should support domestic heavy manufacturing though that outlook is tempered by the threat of tariffs from the US, to which German manufacturing would be particularly exposed.
Fed chair Powell said on Friday that the US is facing more uncertainty but he said ‘despite elevated levels of uncertainty, the US economy is in a ‘good place”. He added the Fed does not need to be in a hurry and can wait for ‘greater clarity’. On Trump’s policies, he said that recent developments, particularly in trade means there is uncertainty and that it’s not clear what the likely impact of policy changes will be. On inflation, he said the path to sustainably returning inflation to target has been bumpy but is expected to continue. He emphasised that the US economy is ‘fine’ and doesn’t need the Fed to do anything and the cost of being cautious is ‘very very low’.
On the agenda this week, we get inflation data in the US and Germany as well as industrial production numbers for the UK and the Euro Area. Also in the UK, we get the latest monthly GDP estimate while we get NFIB and University of Michigan sentiment in the US. On the speaker front, we won’t get any Fed members during the communications blackout ahead of the March 19th FOMC meeting but there are a number of ECB members due out, post their meeting last week, with President Lagarde and Chief Economist Lane amongst those due to speak.