Next week, nonfarm payrolls will likely point to a stabilising labour market in the US. While an ECB interest rate cut seems a done deal, there is uncertainty on the announcement of a fiscal stimulus in China at the “Two Sessions”. European leaders will discuss steps to boost continental defence.
Next Thursday, the ECB will almost certainly cut interest rates by a further 25bp, lowering the deposit rate from 2.75% to 2.50%. The quarterly update of macroeconomic forecasts will probably show slightly higher inflation and weaker economic growth for this year. As interest rates approach a likely neutral area, the ECB will probably signal that further easing might be appropriate but will switch off the autopilot and leave all options open when it comes to the timing of the next cut(s). Consistently with this expectation, we think that the current reference to restrictive monetary policy will be tweaked.
We forecast the ECB will slow the pace of rate reductions to a quarterly frequency from 2Q25, with the depo rate likely to decline to 1.75% by year-end as growth risks increasingly outweigh inflation risks. The ECB meeting will take place few days after the publication of the preliminary estimate for eurozone February inflation. We expect a deceleration in the headline rate from 2.5% yoy to 2.3%, with the core rate likely to ease by 0.2pp to 2.5%, a three-year low.
The Two Sessions refers to the concurrent annual meetings of the National Committee of the Chinese People’s Political Consultative Conference, which starts on March 4, and the National People’s Congress, which opens on March 5. The event is closely watched by markets as it is when China announces the country’s growth target for the year, the main fiscal and economic policies, and the policy direction in some strategic areas.
This year, the GDP growth target will likely be confirmed at 5%, the same as in 2024, which is somewhat above our expectation for Chinese growth this year, which stands at 4.5%. Investors’ focus will be on whether China will announce a large fiscal stimulus to spur consumption and support the real estate sector, the two weak spots of the economy. In light of the big hype following the emergence of DeepSeek, attention will also be on potential policies related to semiconductors, robotics and AI.
The apparent withdrawal of the US security umbrella and the weakening of NATO will pose formidable challenges to Europe. A group of European leaders are expected to meet in London on Sunday to discuss joining the UK to implement a common plan to boost defence and security spending. On 6 March, EU leaders will hold a special summit, during which the European Commission is expected to unveil the details of a defence package.
European Commission President Ursula Von der Leyen proposed an escape clause for defence investment at a national level to allow EU member countries to boost military outlays without jeopardizing compliance with fiscal rules. For projects of common interest, several options are on the table, including the repurposing of spending from the EU budget and issuance of common debt.
We expect nonfarm payrolls rose around 150k in February, little changed from the 143k rise in January. Severe weather, which weighed on January payrolls, largely persisted through the February survey reference week. Timelier indicators of labour demand have shown signs of stabilization (including Indeed job postings, NFIB hiring intentions, and continuing claims), while layoffs have remained low. DOGE-driven cuts to federal jobs are unlikely to impact the February data. With immigration slowing over recent months, the rise in employment needed to absorb population growth is easing. We expect the unemployment rate probably held at 4.0%, with average hourly earnings rising 0.3% mom.
In Turkey, annual inflation likely decreased to 40% in February, from 42.1% in January, primarily driven by the disinflationary base effects in the food and core inflation components. Going forward, we expect inflation to remain on a downward path and to ease to 27% by the end of 2025 as modest domestic demand conditions due to credit growth caps and the country’s tighter fiscal stance, together with real TRY appreciation, support the disinflationary trend. In our view, this will pave the way for the CBRT to reduce its policy rate to 42.5% (by 2.5pp) on Thursday and 30% by the end of the year.
