French services PMI shocks and UK paints stagflation picture – German elections on Sunday in focus

Notes/observations

- Europe is flat to higher, US exceptionalism narrative is fading due to softer Walmart earnings, weaker US retail sales, and Trump’s tariff threats on pharmaceuticals, semiconductors, and wood. Analysts see need for stronger economic data to sustain European gains.

- Flash PMI’s highlighted by weak French services, which dropped to 44.5, jobs cut at the fastest pace since August 2020 and input costs rose. Euro fell to $1.047, 10-year OAT yield down to 3.187%. Germany manufacturing PMI rose to 46.1, a 24-month high, topping the 45.5 estimate, production declines slowed. Services PMI slipped to 52.2 from 52.5, moderated by tariff and geopolitical concerns. Output prices hit a one-year high. UK manufacturing PMI fell to 46.4, missing the 48.5 estimate and marking lowest since December 2023 - fifth straight month of contraction. Business activity stalled, with job losses rising amid falling sales and higher costs. Order books weakened at the fastest pace since August 2023, and costs rose at the sharpest rate since May 2023, driven by National Insurance hikes and minimum wage increases from the October Budget.

- German Elections Preview: Most analysts agree that the biggest market-moving surprise on Sunday would be the AfD significantly outperforming expectations, potentially overtaking CDU/CSU or securing 25%+, leading to coalition difficulties and heightened political uncertainty. This could weaken the euro, increase bond yields, and trigger sell-offs in German equities due to AfD's euroskeptic stance and potential policy disruptions. Other surprises include FDP failing to enter the Bundestag, complicating coalition-building, or SPD unexpectedly rising, which would signal policy continuity but still impact market sentiment. In any case, German elections usually followed by months-long interval before a new German Chancellor assumes office.

- Elsewhere for macro data, UK retail sales rose 1.7% in January, beating expectations, driven by strong food store sales.

- US natural gas futures rose nearly 5% to $4.3/MMBtu - highest since December 2022- with a weekly gain over 16%. An Arctic blast boosted demand, freezing wells cut output by 6.7 bcfd, and record LNG exports plus a 196 bcf EIA storage draw tightened supply.

-Asia closed mixed with Hang Seng outperforming +4.0%. EU indices -0.4% to +0.3%. US futures +0.1%. Gold -0.3%, DXY +0.3%; Commodity: Brent -0.7%, WTI -0.8%; Crypto: BTC +1.0%, ETH +1.6%.

Asia

- Japan Jan National CPI Y/Y: 4.0% v 4.0%e; CPI Ex Fresh Food (Core) Y/Y: 3.2% v 3.1%e.

- Japan Feb Preliminary PMI Manufacturing: 48.9 v 48.7 prior (8th month of contraction).

- Australia Feb Preliminary PMI Manufacturing: 50.6 v 50.2 prior (2nd month of expansion).

- New Zealand Jan Trade Balance (NZD): -0.5B v +0.1B prior.

- BOJ Gov Ueda testified in Parliament that it would respond to sharp rises in bond yields if markets made abnormal moves. Japan's financial system remained stable and that bond yields were determined by the market.

- Japan PM Ishiba noted that rising bond yields could hurt finances; expressed strong concern that rising yields might affect financial stability. Added that had no bond yield talks with BOJ’s Ueda.

- Japan Fin Min Kato noted that higher JBG yields would increase debt-servicing costs in Japan. Long term rates fluctuate depending on various factors; higher long term rates could pressure fiscal situation.

Europe

- UK Feb GfK Consumer Confidence: -20 v -22e.

Americas

- Fed's Kugler (voter) commented that for now, there was a lot of uncertainty about the potential effects of Trump's tariffs. Believed the Fed should hold the policy rate in pace for some time. Downside employment risks had diminished, upside inflation risks remained.

- Fed's Musalem (voter) noted inflation expectations had moved higher, would make Fed's job more difficult if sustained.

Speakers/fixed income/FX/commodities/erratum

Equities

Indices [Stoxx600 +0.28% at 552.58, FTSE +0.03% at 8,665.40, DAX -0.18% at 22,300.42, CAC-40 +0.34% at 8,150.43, IBEX-35 -0.34% at 12,931.05, FTSE MIB +0.14% at 38,311.00, SMI +0.26% at 12,837.60, S&P 500 Futures +0.01%].

Market Focal Points/Key Themes: European indices open mixed but took on an upward bias through the early part of the session; risk appetite impacted on speculation European equities might have become overbought; among better performing sectors are materials and technology; lagging sectors include communication services and consumer discretionary; earnings expected in the upcoming US session include Vipshop and United States Cellular.

Equities

- Consumer discretionary: Brunel [BRNL.NL] ++6.0% (Q4 results).

- Energy: Repsol [REP.ES] -2.0% (UBS cuts to neutral) - Financials: Standard Chartered [STAN.UK] +4.0% (FY24 results).

- Industrials: Leonardo [LDO.IT] +1.5% (prelim results), Heijmans [HEIJ.NL] +10.5% (FY results, beats estimates, guides FY25), NKT [NKT.DK] -2.5% (Q4 results).

- Materials: L'Air Liquide [AI.FR] +3.5% (Q4 results, beats estimates, raises dividend), Kingspan [KGP.UK] +7.5% (FY results, beats estimates).

Speakers

- Russia govt spokesperson noted there was an understanding of the need for Putin-Trump meeting but no details available at this time.

- Philippines Central Bank (BSP) cut its commercial banks RRR by 200bps to 5.00%, effective Mar 28th.

Currencies/fixed income

- Mix EU Preliminary PMI data put some headwinds into the various European currencies.

- EUR/USD continued to probe below the key 1.05 resistance. Soft PMI Services in the region sent the pair 30 pips lower to trade around 1.0475 by mid-session. Focus on the upcoming Federal elections in Germany this weekend.

- GBP/USD was little phased after UK retail sales data beat consensus but drifted lower in sympathy with the mix PMI readings.

- USD/JPY was back above the 150 level after a slew of Japanese officials spoke on bond yields. The yen softened after BOJ Gov Ueda eased worries that the central bank may raise interest rates aggressively. He stressed that BOJ was ready to increase government bond buying if long-term interest rates rose sharply.

- 10-year Bond yield at 4.49%, lower by almost 2bps in session.

- 10-year German Bund below 2.50%, lower by 3.5bps in session

- 10-year UK Gilts at 4.61%, little changed.

Economic data

- (NL) Netherlands Jan House Price Index M/M: +1.6% v -0.7% prior; Y/Y: 11.5% v 11.0% prior.

- (UK) Jan Public Finances (PSNCR): -£22.5B v +£20.2B prior; PSNB (ex-banking groups): -£15.4B v +£18.1B prior; Net Borrowing: -£15.4B v -£20.3Be; Central Govt NCR: -£15.2B v +£19.4B prior.

- (UK) Jan Retail Sales (ex-auto/fuel) M/M: 2.1% v 0.9%e; Y/Y: 1.2% v 0.6%e.

- (UK) Jan Retail Sales (including auto/fuel) M/M: 1.7% v 0.5%e; Y/Y: 1.0% v 0.7%e.

- (DK) Denmark Jan PPI M/M: -0.1% v +1.3% prior; Y/Y: 12.1% v 14.9% prior.

- (MY) Malaysia mid-Feb Foreign Reserves: $117.7B v $116.4B prior.

- (CN) Weekly Shanghai Copper Inventories (SHFE): 260.1K v 230.3K tons prior.

- (TH) Thailand May Foreign Reserves w/e Feb 14th: $245.8B v $243.6B prior.

- (FR) France Feb Business Confidence: 96 v 96e; Manufacturing Confidence: 97 v 96e; Production Outlook Indicator: -15 v -13e; Own-Company Production Outlook: 6 v 3e.

- (CH) Swiss Jan M3 Money Supply Y/Y: 1.6 v 1.9% prior.

- (CZ) Czech Feb Consumer Confidence: 96.6 v 98.0e; Business Confidence: 98.0 v 97.6e; Composite Confidence: 97.8 v 97.5e.

- (RU) Russia Narrow Money Supply w/e Feb 14th (RUB): 18.29T v 18.28T prior.

- (TR) Turkey Jan Foreign Tourist Arrivals Y/Y: 6.1% v 4.2% prior.

- (FR) France Feb Preliminary Manufacturing PMI: 45.5 v 45.3e (25th month of contraction); Services PMI: 44.5 v 48.9e; Composite PMI: 44.5 v 48.0e.

- (DE) Germany Feb Preliminary Manufacturing PMI: 46.1 v 45.5e (32nd month of contraction); Services PMI: 52.2 v 52.5e; Composite PMI: 51.0 v 50.8e.

- (EU) Euro Zone Feb Preliminary Manufacturing PMI: 47.3 v 47.0e (32nd month of contraction); Services PMI: 50.7 v 51.5e; Composite PMI: 50.2 v 50.5e.

- (IT) Italy Jan Final CPI M/M: 0.6% v 0.6% prelim; Y/Y: 1.5% v 1.5% prelim.

- (IT) Italy Jan Final CPI EU Harmonized M/M: -0.8% v -0.7% prelim; Y/Y: 1.7% v 1.7% prelim; CPI Index (ex-tobacco): 120.9 v 120.9e.

- (IS) Iceland Jan Wage Index M/M: 3.1% v 0.4% prior; Y/Y: 9.1% v 6.4% prior.

- (UK) Feb Preliminary Manufacturing PMI: 46.4 v 48.5e (5th straight contraction); Services PMI: 51.1 v 50.8e; Composite PMI: 50.5 v 50.6e.

Fixed income issuance

- (IN) India sold total INR340B vs.INR340B in 2029, 2054 and 2064 bonds.

- (ZA) South Africa sold total ZAR vs. ZAR1.0B indicated in I/L 2033, 2043 and 2050 bonds.

Looking ahead

- 05:25 (EU) Daily ECB Liquidity Stats.

- 06:00 (IE) Ireland Jan PPI M/M: No est v 0.6% prior; Y/Y: No est v 3.3% prior.

- 06:00 (UK) DMO to sell £5.0B in 1-month, 3-month and 6-month bills (£0.5B, £1.5B and £3.0B respectively).

- 06:30 (IN) India announces upcoming bill issuance (held on Wed).

- 06:30 (IN) India Forex Reserve w/e Feb 14th: No est v $638.3B prior.

- 07:00 (MX) Mexico Q4 Final GDP Q/Q: -0.6%e v -0.6% prelim; Y/Y: 0.5%e v 0.6% prelim; GDP Nominal Y/Y: No est v 7.0% prelim; 2024 Annual GDP Y/Y: No est v 3.2% prior.

- 07:00 (MX) Mexico Dec Economic Activity Index (Monthly GDP) M/M: -0.7%e v +0.4% prior; Y/Y: 0.2%e v 0.5% prior.

- 08:00 (UK) Daily Baltic Dry Bulk Index.

- 08:30 (CA) Canada Dec Retail Sales M/M: 1.6%e v 0.0% prior; Retail Sales (ex-auto) M/M: +1.8%e v -0.7% prior.

- 08:30 (US) Weekly USDA Net Export Sales.

- 09:30 (IE) ECB’s Lane (Ireland, chief economist).

- 09:45 (US) Feb S&P Preliminary Manufacturing PMI: 51.2e v 51.2 prior; Services PMI: 53.0e v 52.9 prior; Composite PMI: No est v 52.7 prior.

- 10:00 (US) Feb Final University of Michigan Confidence: 67.8e v 67.8 prelim.

- 10:00 (US) Jan Existing Home Sales: 4.13Me v 4.24M prior.

- 11:00 (EU) Potential sovereign ratings after European close (Moody’s on Austria & Sweden).

- 11:30 (US) Fed’s Jefferson.

- 12:45 (CA) BOC Gov Macklem.

- 13:00 (US) Weekly Baker Hughes Rig Count.