Waiting for the Fed
US equity markets sold off yesterday, reversing some of the gains made over the previous couple of sessions, though European stocks advanced. Elsewhere, bond yields were broadly unchanged on the day, while the main currency pairs largely treaded water. The euro and sterling are both a touch weaker against the dollar this morning, ahead of the Fed’s interest rate decision later, trading at about $1.09 and $1.2970 respectively, with the single currency also slipping a little against the pound to £0.84. The Fed is widely expected to keep interest rates unchanged today, so the focus will be on what it signals about the outlook for monetary policy given Trump’s tariffs are likely to weigh on economic growth while at the same time putting some upward pressure on inflation.
Tech stocks led the decline in US equity markets with the Nasdaq down almost 2% (the S&P was off 1%), while European stocks outperformed, gaining almost 1% on the day. In government bond markets, yields were largely flat yesterday, while Germany is leading a modest decline in European yields this morning with 10-year yields down almost 5bps. They have been on a modestly declining trend over the past week or so – now down almost 15bps – having risen sharply following the announcement of increased infrastructure and defense spending (the amendment to the debt brake paving the way for the latter was passed in the Bundestag yesterday, as expected).
The ZEW index of economic sentiment in Germany rose sharply again in March according to the latest release, up almost 26 points from February, with the “brighter mood…due to positive signals regarding future German fiscal policy (and) the sixth consecutive interest rate cut by the ECB (which) means favourable financing conditions for private households and companies”. In the US meanwhile, manufacturing output rose again last month and over the three months to February was up 0.7% on the three months to November (which may reflect some front-running of production ahead of expected tariffs).
In terms of economic data for the day ahead, it is relatively quiet with labour costs for Q4 2024 and a final reading for CPI inflation in February both due in the Euro area.