USD/JPY at five-month low

EU mid-market update: USD/JPY at 5-month low; Opening optimism from one-month delay to auto tariffs but focus is on re-evaluation of European bonds as defense spending enters new era; ECB expected to cut rates.

Notes/Observations:

- Europe trades mixed to red, dictated by earnings and volatile defense sector. Yields continue to be electric, lifting +8-10bps across Euro Area. Bond sell off is led by German bunds, extending drop from yesterday (now steepest sell-off since post-Berlin Wall era). Increased defense spending and required Govt fiscal/debt reform needed is on forefront of minds.

- Trump’s one-month delay on auto tariffs for Canada and Mexico lifted EU auto names too, like Mercedes-Benz, BMW, VW, Stellantis and Renault. The easing of trade tensions has improved risk appetite across markets.

- All eyes are on the ECB, expected to cut its key deposit rate by 25bps to 2.5% today. Focus is on rate path with more uncertainty at the April meeting. Large majority of analysts expect the next cut in April, but acknowledge a pause is possible.

- USD/JPY has dropped below 148, its lowest since Oct 2024, following the outcome of Rengo wage negotiations. Speculative short positions in yen futures have recently surged, partly resembling the setup before last August’s sharp market selloff triggered by a BoJ rate hike and weak U.S. labor data. According to BCA Research, Japan’s deeply negative real rates have fueled a yen-funded AI stock bubble, making the trade reflexive—vulnerable to either rising Japanese yields or fading AI euphoria. It suggests, if USD/JPY falls below 145, this could trigger a broader market selloff, potentially bursting the AI-driven asset bubble.

- European leaders are convening in Brussels to hammer out plans for substantially increased defense spending. Germany’s bold proposal to allow limitless borrowing to fund defense is pressuring the EU Commission to revisit funding frameworks—an extension to the proposed €800B additional borrowing.

- Macro data points to ongoing challenges: French HCOB Construction PMI slid to 39.8 in February, the steepest drop in recent months, while German construction activity also weakened. UK construction PMI dropped notably from 48.1 to 44.6.

- Ahead of tomorrow’s US jobs report: PageGroup reports that interview-to-offer conversions remain a major bottleneck, signaling short-term pressures on staffing efficiency, with January and February continuing late 2024's slowdown and March seen as a key recalibration point. Meanwhile, ZipRecruiter data from December to February indicates a potential hiring rebound, with only a 2% sequential decline in Q1—significantly better than previous drops of 10–13%. This suggests a recovery from a prolonged 28-month hiring slowdown, hinting at improving labor market conditions.

- On the earnings front, Air France KLM, Lufthansa, and Deutsche Post delivered strong results. Deutsche Post announced €1B cost-cutting plan. UK names showed mixed signals, with notable declines in Melrose and Rentokil.

- Asia closed higher with Hang Seng +3.3%. EU indices -1.2% to +0.3%. US futures -0.8% to -1.2%. Gold -0.9%, DXY -0.2%; Commodity: Brent +0.3%, WTI +0.4%; Crypto: BTC +0.9%, ETH +2.2%.

Asia

- South Korea Feb CPI M/M: 0.3% v 0.4%e; Y/Y: 2.0% v 2.1%e; CPI (Ex Food and Energy) Y/Y:1.8% v 1.9%e.

- Australia Jan Trade Balance (A$): 5.6B v 5.9Be; Exports M/M: 1.3% v 1.2% prior; Imports M/M: -0.3% v +5.9% prior.

- Australia Jan Building Approvals M/M: 6.3% v 0.0%e.

Americas

- Fed Beige Book noted that overall economic activity rose slightly since mid-January. Six Districts reported no change, four reported modest or moderate growth, and two noted slight contractions. Consumer spending was lower on balance, with reports of solid demand for essential goods mixed with increased price sensitivity for discretionary items, particularly among lower-income shoppers.

- US Commerce Sec Lutnick reiterated that Pres Trump was leaning towards helping out automakers for a month; Reiterated that April 2nd reciprocal tariffs are coming.

- Canada govt said to be willing to reduce retaliatory measures if the US drops some additional duties.

- White House trade adviser Navarro stated that Canada PM Trudeau should tone rhetoric down.

Speakers/fixed income/FX/commodities/erratum

Equities

Indices [Stoxx600 -0.44% at 553.66, FTSE -0.94% at 8,673.31, DAX +0.34% at 23,198.20, CAC-40 -0.25% at 8,152.94, IBEX-35 -0.58% at 13,146.00, FTSE MIB +0.23% at 38,607.00, SMI -1.05% at 12,975.20, S&P 500 Futures -1.04%].

Market Focal Points/Key Themes: European indices open generally higher but lost momentum to trade mostly mixed in the early part of the session; markets apparently focused on uncertainty around tariffs; among better performing sectors are materials and industrials; sectors inclined to the downside include real estate and utilities; Kenmare receives takeover offer from Oryx and Michael Carvill; focus on ECB rate decision later in the day; earnings expected in the upcoming US session include Vivendi, Broadcom and Hewlett Packard.

Equities

- Consumer discretionary: Deutsche Post [DPW.DE] +11.5% (results), Lufthansa [LHA.DE] +8.0% (results), Air France/KLM [AF.FR] +16.5% (results), PageGroup [PAGE.UK] -3.5% (results; notes conversion of interviews to accepted offers continues to be a key bottleneck).

- Energy: Harbour Energy [HBT.UK] -12.5% (results) - Financials:

- Healthcare: Merck KGaA [MRK.DE] +2.5% (results).

- Technology: Siltronic [WAF.DE] +3.0% (results).

- Materials: Kenmare Resources [KMR.UK] +43.5% (rejected offer).

Speakers

- Bank of England (BOE) Decision Maker Panel (DMP) Jan Survey: 1-year CPI Expectations: 3.1% v 3.1%e. Maintained 3-year ahead CPI at 2.8%.

- Malaysia Central Bank Policy Statement noted that the current OPR level remained supportive of economy. Economic strength seen being maintained in 2025 and reiterated stance that inflation was expected to remain manageable. Prospects continued to support MYR currency (Ringget).

- Japan Rango Trade Union said to seek wage hike of 6.09% in 2025 (compared to 5.95% year ago).

- China Fin Min Lan Foan stated that must adjust policy based on 'real' conditions. Reiterated policy would continue to be strengthened. Would to make 'good' use of policy space
And had ample policy tools and space for uncertainty. To study and roll out new policies in 'timely' manner.

- China PBOC Gov Pan Gongsheng stated that made multiple policy adjustments in 2024 and would implement a moderately loose monetary policy. Would cut interest rates and RRR at the appropriate time. To use a wide range of tools to keep liquidity sufficient.

- China Commerce Min Wang noted that weak demand was main issue for goods consumption. To make all efforts to stabilize trade.

- China NPC deputy Liu Hanyuan stated that China could stop importing crude oil in 20 years as the country accelerated the installation of renewable energy capacity and energy storage.

Currencies/fixed income

- USD was on soft footing as global yields moved higher over the past few sessions. Greenback also losing some safe-haven status after a one-month tariff reprieve was put in place on US car imports. Market hoping that similar relief could be extended to other products on the US-Canada/Mexico and China trade front.

- EUR/USD tested above the 1.08 level in the aftermath of the surge in EU rates on the back of greater defense and investment pledges by countries. The 10-year Bund yield hitting the highest level since October 2023. Focus on upcoming ECB rate decision where analysts are unanimous of another 25bps cut in the Key Rates. Dealers to focus on rate path outlook with more uncertainty at the April meeting increasing. Large majority of analysts had expected another cut in April, but acknowledge a pause is possible (**Note: Current markets pricing in two 25bps cut to June). Pair currently around 1.0780 by mid-session.

- GBP/USD at 1.2870 by mid-session after probing above 1.29 at the start for a 16-week high. The psychology 1.20 level now in play.

- USD/JPY moving below the 148 level as Japanese bond yields moved to multi-year highs. The session saw JGB yields up between 5-10bps for all tenors from 2-years to 40-years for approx. 15 year highs. Comments on 2025 wage demand by the Rango Union also bouyed rate hike sentiment.

- Bond yields continued to move higher once again in the aftermath of increase spending pledges on defense for Europe. 10-year German Bund yield at 2.87% and 10-year Gilt yield at 4.80%. 10-year Treasury yield at 4.31%.

Economic data

- (CH) Swiss Feb Unemployment Rate:2.9% v 2.9%e; Unemployment Rate (seasonally adj): 2.7% v 2.7%e.

- (SE) Sweden Q4 Current Account (SEK): 111.9B v 92.3B prior.

- (SE) Sweden Feb Preliminary CPI M/M: 0.6% v 0.5%e; Y/Y: 1.3% v 1.1%e.

- (SE) Sweden Feb Preliminary CPIF M/M: 0.9% v 0.7%e; Y/Y: 2.9% v 2.7%e.

- (SE) Sweden Feb Preliminary CPIF (ex-energy) M/M: 0.9% v 0.7%e; Y/Y: 3.0% v 2.7%e.

- (MY) Malaysia Central Bank (BNM) left the Overnight Policy Rate unchanged at 3.00% (as expected).

- (HU) Hungary Jan Industrial Production M/M: 0.8% v 1.0%e; Y/Y: -3.9% v -3.6%e.

- (HU) Hungary Jan Retail Sales Y/Y: 4.7% v 1.4%e.

- (CZ) Czech Q4 Average Real Monthly Wage Y/Y: 4.2% v 3.8%e; Average Nominal Monthly Wage Y/Y: 7.2% v 7.1% prior.

- (BR) Brazil Feb FIPE CPI (Sao Paulo) M/M: 0.5% v 0.2% prior.

- (DE) Germany Feb Construction PMI: 441.2 v 42.5 prior- (ZA) South Africa Q4 Current Account Balance (ZAR): -32B v -70Be; Current Account to GDP Ratio: -0.4% v -0.9%e.

- (IS) Iceland Feb Preliminary Trade Balance (ISK): -57.9B v -55.7B prior.

- (IS) Iceland Q4 Current Account (ISK): -95.2B v +52.3B prior.

- (UK) Feb Construction PMI: 44.6 v 49.5e (2nd month of contraction).

- (EU) Euro Zone Jan Retail Sales M/M: -0.3% v +0.1%e; Y/Y: 1.5% v 2.0%e.

- (CY) Cyprus Feb CPI M/M: +0.3% v -1.3% prior; Y/Y: 1.9% v 2.5% prior.

Fixed income issuance

- (ES) Spain Debt Agency (Tesoro) sold total €5.3B vs. €4.5-5.5B indicated range in 2031 and 2035 SPGB bonds.

- Sold €2.53B in 3.10% July 2031 SPGB bonds; Avg Yield: 3.067% v 2.705% prior; bid-to-cover: 1.74x v 1.96x prior.

- Sold €2.77B in 3.15% Apr 2035 SPGB bonds; Avg Yield: 3.507% v 3.132% prior; bid-to-cover: 1.88x v 1.78x prior.

- (ES) Spain Debt Agency (Tesoro) sold €514M vs. €250-750M indicated range in 0.7% Nov 2033 inflation-linked bonds (SPGBei); Real Yield: 1.271% v 1.104% prior; Bid-to-cover: 2.27x v 2.20x prior (Nov 7th 2024).

- (FR) France Debt Agency (AFT) sold total €12.995B vs. €11.0-13.0B indicated range in 2035, 2039 and 2043 Bonds.

- Sold €6.383B in 3.20% May 2035 Oat; Avg Yield: 3.54% v 3.15% prior; Bid-to-cover: 2.87x v 2.23x prior.

- Sold €2.898B in 4.75% Apr 2035 Oat; Avg Yield: 3.51% v 3.24% prior; Bid-to-cover: 2.72x v 1.97x prior.

- Sold €1.194B in 1.75% Jun 2039 green Oat; Avg Yield: 3.71% v 3.09% prior; Bid-to-cover: 3.30x v 2.41x prior.

- Sold €2.520B in 2.50% May 2043 Oat; Avg Yield: 3.88% v 3.77% prior; Bid-to-cover: 2.38x v 2.92x prior.

Looking ahead

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

- 05:40 (UK) BOE 7-day short-term repo operation (STR).

- 06:00 (IE) Ireland Q4 Final GDP Q/Q: No est v -1.3% prelim; Y/Y: No est v 6.3% prelim.

- 06:00 (IE) Ireland Q4 Current Account Balance: No est v €23.0B prior.

- 06:00 (ZA) South Africa Jan Electricity Consumption Y/Y: No est v -0.7% prior; Electricity Production Y/Y: No est v 3.2% prior.

- 06:00 (TR) Turkey Central Bank (CBRT) Interest Rate Decision: Expected to cut One Week Repo Rate by 250bps to 42.50%.

- 06:00 (RO) Romania to sell combined RON1.3B in 2028 and 2034 bonds.

- 07:00 (UR) Ukraine Central Bank (NBU) Interest Rate Decision: Expected to raise Key Rate by 100bps to 15.50%.

- 07:00 (CL) Chile Jan Nominal Wage Y/Y: No est v 7.3% prior.

- 07:30 (US) Feb Challenger Job Cuts Y/Y: No est v -39.5% prior.

- 08:00 (RU) Russia Gold and Forex Reserve w/e Feb 28th: No est v $634.6B prior.

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

- 08:15 (EU) ECB Interest Rate Decision: Expected to cut Key Rates by 25bps. Expected to cut Deposit Rate by 25bps to 2.50% (**Note: ECB research estimated the neutral rate between 1.75% and 2.25%). Expected to cut Main 7-Day Refinancing Rate by 25bps to 2.65%; Expected to cut Marginal Lending Facility by 25bps to 2.90%.

- 08:30 (US) Q4 Final Nonfarm Productivity: 1.2%e v 1.2% prelim; Unit Labor Costs: 3.0%e v 3.0% prelim.

- 08:30 (US) Initial Jobless Claims: 233Ke v 242K prior; Continuing Claims: 1.88Me v 1.862M prior.

- 08:30 (US) Jan Trade Balance: -$128.8Be v -$98.4B prior.

- 08:30 (CA) Canada Jan Int’l Merchandise Trade (CAD): 1.3Be v 0.7B prior.

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

- 08:45 (EU) ECB Chief Lagarde post rate decision press conference.

- 10:00 (US) Jan Final Wholesale Inventories M/M: 0.7%e v 0.7% prelim; Wholesale Trade Sales M/M: 0.6%e v 1.0% prior.

- 10:00 (CA) Canada Feb Ivey Purchasing Managers Index: No est v 47.1 prior; PMI (unadj): No est v 46.2 prior.

- 10:30 (US) Weekly EIA Natural Gas Inventories.

- 11:30 (US) Treasury to sell 4-Week and 8-Week Bills.

- 12:00 (CA) Canada to sell 10-year Bonds.

- 15:30 (US) Fed’s Waller.

- 18:00 (KR) South Korea Jan Current Account Balance: No est v $12.4B prior; Balance of Goods (BoP): No est v $10.4B prior.

- 19:00 (US) Fed’s Bostic.

- 19:30 (AU) Australia Jan Household Spending M/M: 0.5%e v 0.4% prior; Y/Y: 3.4%e v 4.3% prior.

- 22:00 (ID) Indonesia Feb Foreign Reserves: No est v $156.1B prior.

- 22:30 (JP) Japan to sell 3-Month Bills.

- 23:30 (TW) Taiwan to sell NT$30B in 5-year Bonds.