Risk-off sentiment is taking hold in the markets. Firstly, the US macroeconomic momentum is running out of steam, with rates easing, led by the long end. Secondly, peace talks in Ukraine also seem to be faltering, with initial meetings between the Ukrainian President and the Trump administration doing little to move towards a rapid end to the conflict.
Finally, France, which had slipped back under the radar, is back in the investors' sights after its AA- sovereign rating was placed on Negative outlook by S&P. The week ahead will confirm or refute these bad omens, with the publication of PMIs on both sides of the Atlantic as well as job creations in the United States. Finally, after a number of high-profile interventions by members of the ECB's Governing Council, Thursday's meeting will be an opportunity for investors to get some insight into the consensus within the central bank on whether or not its monetary policy is restrictive.
Rates: bull steepening of $ curves over Friday's session, driven by the publication of the core PCE in the United States, which revealed there had been a marked decline in personal outlays. At the close of the European session, the yield for the 2Y TNote was down 4bp at 4%, with investors continuing to price in more rate cuts by the Fed (66bp in total over 2025). The steepening was more pronounced for the 5Y-30Y segment, which traded at 49bp (+4bp). € yields were virtually unchanged, with the 10Y Bund closing at 2.41% and the 2Y Schatz at 2.02%. Asset swap margins and sovereign spreads were also little changed, with the 10Y OAT-Bund spread trading at 74bp (+1bp over the session), while the 10Y BTP-Bund remained stable at 113bp. Note that S&P placed France's sovereign rating on Negative outlook.
FX: the DXY dollar index closed slightly higher at 107.35 for a gain of 0.7% over the week. Most G10 currencies weakened against the US dollar. The euro eventually stabilised at 1.04. Today the first estimates of Eurozone inflation for February will be released, ahead of the ECB meeting on 6 March, with the central bank expected to cut its deposit rate by 25bp to 2.50%. Tuesday will be a key date for customs tariffs. With the exception of the Hungarian forint, most emerging currencies continued to decline against the greenback.
Equities: after starting the session in the red, European indices rebounded to record a tenth consecutive week of gains, the best run since last March. In the case of the SXXP, utilities and construction outperformed, while techs were the biggest losers. The FTSE100 once again outperformed in the case of the European blue chips. In the United States, the indices were up slightly at the end of the US session but were down for the second week in a row, with an underperformance by the NDX (-4.5%) and the Magnificent 7 (-6%).The publication of the Atlanta GDPNow, which now sees the economy shrinking in Q1-25, reinforced the stagflationary narrative in evidence in recent sessions.
Credit: widening of iTraxx indices (+0.5bp for the Main, +1bp for the X-Over) with a further underperformance by carmakers (the Stellantis 5Y CDS widening by 4bp, the VW and Mercedes 5Y CDS by 3bp) against the backdrop of the US tariff risk. BASF's 5Y CDS also widened, adding 2bp following the publication of weaker-than-expected results, mainly attributable to its Chemicals, Materials and Industrial Solutions divisions. Turning to the X-Over, automotive suppliers underperformed (Forvia 5Y CDS widened by 12bp, the Valeo 5Y CDS by 6bp) following mixed results (see Industry News - HY section below). In the cash market, however, there was a rather more measured widening of spreads (6bp in the case of the Forvia 3.75% 28c25), accompanied by a flattening of the issuer’s curve (7bp widening by the Valeo 2027, but a widening of only 3bp in the case of the 2030), considering the falls in the share prices of the two equipment manufacturers (-11% for Valeo, -23% for Forvia), due in particular to Forvia suspending dividend payments in 2025.
Commodities: oil prices subsided over Friday's session, with Brent crude down 1.1% near the close, trading around $73.3/bbl. The week's developments rumbled on in the news feeds with no new driving factors, with negative macro sentiment emanating from Trump's tariff policies cited as the main downside factor. Conflicting information about the restart of crude flows via Ceyhan was also noted, with foreign producers stating that they had no plans to restart flows, without any formal contact from the authorities. Gas prices in Europe closed 1.7% lower at €44.4/MWh, as the market stabilised after wide swings earlier in the week. Fundamentally, weather models were revised slightly downwards (bullish) until mid-March, but price formation remains focused on storage targets and news from Russia and Ukraine that are the factors susceptible of instilling significant direction.
France: inflation, as measured by the HICP, slowed from +1.8% YoY to +0.9% YoY in February (consensus: +1.1% YoY), chiefly because of a fall in regulated electricity prices.
Germany: inflation, as measured by the HICP, remained stable at +2.8% YoY, a touch above expectations, probably on account of a rise in food prices (+2.4% YoY vs. +0.8% YoY). Turning to the CPI, there was some relief at the fact it slowed to +2.6% YoY from +2.9% YoY, with weaker inflation in service prices (+3.8%, down from +4.0%) after having been sticky for several months.
United States: the PCE price index was more or less in line with the consensus at +0.28% MoM (+2.65% YoY). The overall PCE price index increased by 0.33% MoM and 2.5% YoY. There was a sharper-than-expected increase in personal income of 0.9% (consensus: +0.4%), but there was a decrease in personal outlays of 0.2%, at odds with expectations (consensus: +0.2%). The personal savings rate increased to 4.6%.
