Tariffs, Payrolls and a tech recovery rally in the US

European equities are following the US lower on Friday. The European equity space is a sea of red, with big declines across most sectors. The weakest performers include luxury stalwarts like Hermes, LVMH, Kerring and L’oreal, while ASML is managing to eke out a gain, as US tech stocks stage a recovery in the pre-market. There could be some respite later today, as US equity index futures are pointing to a higher open for US stocks after a strong sell off on Thursday.

European stocks continue to outperform US peers

European stocks have had a tough week; however, they are still outperforming their US peers. The S&P 500 is lower by more than 2% so far this week, while the Eurostoxx index is mostly flat, and the FTSE 100 is down 1.8%. On a currency adjusted basis, European stocks are easily outpacing their US peers as the dollar falls yet again on Friday. The dollar index is now at its weakest level since early November, and the precipitous fall shows no sign of slowing down.

US Dollar loses its crown

US stocks might be dragging other markets with it, but the decline in the dollar has allowed the euro to roar back to life. EUR/USD is higher by 3.3% this week and is the second best performing currency in the G10. $1.10 is looking like the next major level for this pair. The currency has been boosted by Germany’s planned fiscal bazooka to reboot its flagging economy. Although the European bond market has stabilized at the end of the week, Eurozone sovereign yields have still surged 32 bps so far this week. The bond market does not seem to care about the details of Germany’s spending plans, the timeline or the fact it has been announced by Friedrich Merz, even though he has not yet managed to form a government. This could lead to a short-term recovery in bond yields, although the euro is continuing to rise, suggesting that the euro’s rise has untethered from Europe’s bond market.

Tarif angst drives markets lower

The spike in volatility since the start of the year, has gained pace in March. This has happened at the same time as President Trump imposes more of his economic policy on the world. The markets are full of tariff angst. Team Trump’s chopping and changing when it comes to tariffs, is emblematic of an erratic policy response. The US is starting to look like the UK circa 2020-2025, which does not bode well for markets or investor confidence.

Tariff fears are no longer contained to inflation risks, they are now infiltrating growth fears. This means that the NFP report is not the only economic data point to watch today. The Atlanta Fed GDPNow  estimate for Q1 GDP will also be released later. Last week the estimate was revised sharply lower to -1.5%. This undoubtedly spurred market jitters and the stock market sell off that started in the US. Today’s reading could calm markets if the estimate is recalibrated higher.

What to expect from the NFP report

Whether that happens could depend on the outcome of today’/s payrolls report. See our preview below.

This Friday we will get the latest labour market data from the US. For now, economists expect the US labour market to create 160k jobs last month. This is a slight uptick on January’s figure of 143k, but it suggests a slowdown in labour market momentum since 2024. A strong labour market has been a key support for the US economy and for consumer spending, however, the push by Elon Musk and his colleagues at Doge to reduce the size of the government and to cut government spending risks weakening the labour market. While there have not yet been mass redundancies of Federal workers, there have been some, and there is also a hiring freeze. The government has been a key component of the labour market in recent years. Last month, the government boosted jobs growth by 32,000, we doubt that it will have the same impact in February.

Data from the US has been trending lower in recent months, and the Citi economic surprise index fell to its lowest level since September, as the US economic malaise continues. The deteriorating economic data has hindered US stock markets as growth fears remain elevated. The stirrings of discontent around the US economy in recent weeks risks turning into something more onerous for investors if this week’s US economic data shows further deterioration. It is worth noting that the ISM services employment component was stronger than expected for February, so there is a chance of an upward surprise for payrolls later today.

It is worth noting that consumers’ confidence levels in the jobs market over the medium term has also trended lower in recent months. This means that the unemployment rate is also worth watching. Any uptick in the unemployment rate could trigger a broad bout of risk aversion. The market is expecting no change, and the unemployment rate is expected to remain steady at 4%. Interestingly, the drop in immigration could limit any deterioration in wage growth, we may need to see some serious economic deterioration for wage growth to slow significantly. Wage growth is expected to hold steady at 4.1% for last month.

Payrolls is the last labour market indicator to be released before the Fed meeting on 18/19th March. Fed speakers have, on balance, been trending in a hawkish direction since October. However, in recent weeks there has been a notable increase in caution in Fed speakers’ comments, as the central bank waits to see the impact of the new Trump administration’s economic policies. We expect this tone of caution to continue when Jerome Powell speaks later on Friday.  However, any comments about the impact of tariffs on US inflation pressures could have a large market reaction, especially for the dollar and bonds.