German fiscal package negotiations take centre stage

In focus this week

The main spotlight of the week will be on news regarding the negotiations of the German fiscal package. The package is scheduled to be passed in the Bundestag on Tuesday and then in the Bundesrat on Friday, with expectations for approval. Merz states that CDU/CSU unanimously support the proposal, although there are risks that some may not vote in favour and that Bavaria's 'Free Voters' might not support it in the Bundesrat on Friday.

In the US, President Trump announced that he will be speaking with Russian President Putin about ending the war in Ukraine on Tuesday. On the data side, February retail sales data will be released this afternoon. Markets will closely follow if the recent weakness seen in consumer sentiment surveys has translated into more cautious spending behaviour.

On Wednesday, the FOMC meeting is set to take place, with an unchanged rate decision anticipated. Attention will be on Powell's communication about future rate cuts and economic projections, as the Fed may signal further tapering or the end of QT soon. On Thursday, the Bank of England is expected to keep the Bank Rate at 4.50%, following its gradual approach to monetary policy. Meanwhile, the SNB is likely to cut the policy rate by 25bp to 0.25% due to subdued inflation pressures.

Economic and market news

What happened over the weekend

In Germany, the incoming government has reached an agreement with The Greens on reforming the debt brake and establishing an infrastructure fund. Overall, the package is nearly identical to what was originally proposed. Concessions to The Green party include a commitment for the off-budget fund to focus on green initiatives, with EUR 100bn out of the EUR 500 billion dedicated to this cause. On defence, the agreement maintains the exemption of spending above 1% of GDP from the debt brake, with an expanded definition to include aid to Ukraine and intelligence services. The third aspect of relaxing regional governments' "black zero" policy is also agreed upon.

In the euro area, final inflation figures came in for Germany, France and Spain. While France and Spain reported levels consistent with their initial flash estimates, German final HICP inflation was revised down to 2.6% y/y from 2.8% y/y in the flash release. The lower final print will pull down the euro area HICP where German inflation has a weight of 28%.

In the US, the University of Michigan's consumer survey revealed a significant decline in sentiment as inflation fears grew. Preliminary March results indicate a 1-year inflation outlook of 4.9%, up from February's 4.3%. Consumers are less optimistic, with current situation assessments dropping to 63.5 from 65.7, and future expectations falling to 54.2 from 64.0. The impact on consumption will be closely watched when February retail sales data is released today.

In Sweden, the Labor Force Survey for February showed employment rising by 0.2%, while the unemployment rate fell to 8.9%, mainly due to a decrease in the activity rate and more discouraged workers. Although employment aligns with the Riksbank's December forecast, unemployment remains high. The decline in temporary workers suggests a weak labour market outlook for the next 6-9 months, with slow improvement expected later this year. The data highlights low resource utilization, indicating potential downside risks for Riksbank rate cuts, though high inflation remains the primary concern.

The Swedish Moderate Party announced that: 1) The government will add SEK 11.5bn of fiscal spending in the spring amendment budget bill, likely with parts of it being defence related. 2) The Moderate Party is open to more borrowing, which they label should be temporary in nature. How large the increase in defence spending eventually will be is likely to be decided at the upcoming NATO summit in June. For a discussion on defence spending, see Reading the Markets Sweden, 21 February.

Equities: In the absence of new tariff threats, equities engineered a nice rebound bounce on Friday. Nasdaq a full 2.6% higher, Russell 2000 2.5%, S&P 500 2.1% and Dow 1.7%. This was a classic rebound session where investors bought the dip in the most battered sectors, such as tech, energy, banks and consumer discretionary. All sectors were notably higher, though cyclicals were in clear favour. The return in risk appetite was visible outside US too, with Stoxx 600 up 1.1% with banks, tech and industrials in the lead. However, this still takes most US lower for the fourth straight week and Europe for its second. One day without tariff news was too little for investor to build upon, as US futures are nosediving again this morning.

FI&FX: SEK, NOK and EUR gained vis-à-vis USD and JPY on Friday as risk sentiment recovered to end the week. EUR/USD traded close to the 1.09 level and EUR/SEK fell towards the 11.00 level. Bond yields held steady with the 10Y US Treasury trading close to 4.30% and the 10Y German bond yield trading around the 2.90% level.