Germany elects a new Chancellor

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• US consumer & housing data miss expectations—growth fears mount

• Stocks slide as tariff threats and weak data rattle markets

• Merz won federal elections in Germany & seeks independence from the US

• UK rate cut expectations fade as inflation & wages stay hot

• Japan yields hit highest since 2009—BOJ will likely to hike more

• Oil dips again—OPEC may be forced to delay hikes

Let’s dissect

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Markets Snapshot

Macro and Fixed Income Markets

• US : The week's economic data did little to bolster confidence in the US. In January, housing starts—a measure of the start of construction on new, privately owned homes in the U.S.—dropped nearly 10% from December to an annualized rate of 1.37 million units, according to the U.S. Census Bureau.

• Business activity also showed signs of strain. S&P Global’s flash Composite Purchasing Managers' Index (PMI) for February dipped to 50.4, a 17-month low, signaling near-stagnant growth. The PMI services sector slipped into contraction at 49.7—its weakest reading in over two years—offsetting modest expansion in manufacturing. The report pointed to policy uncertainty and rising input costs as key pressures. The PMI is an indicator of the prevailing direction of economic trends in the manufacturing and service sectors with the Readings above 50 signals that the economy is expanding and below 50 it is contracting.

• The University of Michigan’s Index of Consumer Sentiment dropped nearly 10% in February to 64.7, down from 71.7 in January and below last February’s 76.9, with all components declining. A sharp 19% drop in buying conditions for durable goods, largely due to tariff concerns, led the downturn. Short-term inflation expectations surged from 3.3% last month to 4.3% in February, the highest level since November 2023, marking two consecutive months of increases and is now well above the 2.3–3.0% range observed in the two years before the pandemic. Long-term inflation expectations also climbed, rising from 3.2% in January to 3.5% in February—the largest month-over-month increase since May 2021.

• On Tuesday, U.S. President Trump mentioned plans to impose 25% tariffs on automobile, semiconductor, and pharmaceutical imports, with a formal announcement expected by April 2. The new tariffs are expected to affect industries and trading partners such as Mexico, South Korea, Malaysia, Singapore, and potentially the EU, likely leading to higher consumer prices and increased costs for businesses. Trump also set a March 12 start date for 25% tariffs on all imported steel and aluminum, eliminating exemptions for Canada, Mexico, the European Union, and other trading partners. Additionally, these tariffs will apply to hundreds of downstream products made from steel and aluminum, including electrical conduit tubing and bulldozer blades.

• Finally, the minutes from the January 2025 FED’s FOMC meeting highlighted the Fed's cautious stance on monetary policy amid ongoing uncertainty. Policymakers indicated that rates could remain restrictive if economic strength persists and inflation stays elevated but may be eased if inflation returns to 2% or labor market conditions weaken. The Fed left its policy rate unchanged at 4.25%–4.5%.

• EU: Business activity in the eurozone remained in expansion mode for a second consecutive month in February, with S&P Global’s HCOB Flash Eurozone Composite PMI Output Index unchanged at 50.2 from January. However, the survey pointed to persistent weakness in new orders, job cuts, rising input costs, and higher output prices. The performance also varied across the region. Germany’s output expanded for a second consecutive month, while France saw a sharp decline. The rest of the eurozone posted solid growth. In the UK, the Composite PMI, covering services and manufacturing, remained above 50 but edged lower from January.

• Germany: Center-right leader, Friedrich Merz, emerged victorious in Sunday’s federal elections, clearing his path to become the country’s next Chancellor. According to exit polls, Merz’s Christian Democratic Union/ Christian Social Union (CDU/CSU) alliance secured approximately 29% of the vote. The far-right Alternative for Germany (AfD) achieved its highest-ever electoral result, coming in second with around 20%, while Chancellor Olaf Scholz’s Social Democrats (SPD) placed third with 16.3%. To form a governing majority, the CDU/CSU will require at least one, and potentially two, coalition partners. Merz has categorically ruled out any cooperation with the AfD, making a CDU/CSU-led coalition with the SPD, possibly including the Greens as well.

• Speaking on German television, Merz emphasized his goal of reducing dependence on the United States, noting that he never expected to have to make such a statement. Meanwhile, Robert Habeck, the Green Party’s candidate for chancellor, urged his prospective coalition partners to prioritize military aid to Ukraine and increased defense spending before confirming other details of a coalition agreement.

• UK: Stronger-than-expected UK inflation and wage data led financial markets to scale back expectations for three Bank of England rate cuts this year. Annual consumer price growth accelerated to 3% in January, up from 2.5% the previous month, marking the fastest pace since March 2024. Core inflation, which strips out food and energy prices, also rose, climbing to 3.7% from 3.2%.

• Wage growth also remained robust. In the three months through December, average earnings excluding bonuses increased by 5.9% year-over-year, up from 5.6% in the prior quarter. Meanwhile, the labor market proved more resilient than expected, with the jobless rate holding steady at 4.4%, below the 4.5% consensus forecast from a FactSet economist poll.

• Japan: The yen strengthened to around JPY 150.4 per U.S. dollar, up from 152.3 the previous week, as January’s consumer inflation came in hotter than expected at 3.2% year-over-year, up from 3.0% in December. The data fueled expectations that the Bank of Japan (BoJ) may take a more aggressive approach to rate hikes. Stronger-than-expected economic growth reinforced this view as GDP expanded by 0.7% in the final quarter of 2024, exceeding the 0.3% consensus and improving from 0.4% in Q3. On an annualized basis, the economy grew 2.8% over the last three months of the year.

• Japanese government bond (JGB) yields continued to rise, with the 10-year JGB yield reaching 1.42%, its highest level since 2009, up from 1.35% the previous week. Bank of Japan (BoJ) Governor Kazuo Ueda stated that the central bank is prepared to increase JGB purchases if long-term yields rise sharply to counter abnormal market movements. He also reiterated that if the inflation outlook continues to improve, more interest rate hikes would come into sight.

Equity Markets

• US: Markets fell over the holiday-shortened week. After a strong start on Tuesday, with the S&P 500 reaching record highs through Wednesday, momentum reversed in the latter half. The S&P 500, Nasdaq, and Dow each fell by around 2% for the week as Trump announced plans for new tariffs, while PMI and consumer sentiment data weakened, adding to market concerns. .

• Investor sentiment worsened on Thursday following Walmart’s earnings report. While the retailer surpassed quarterly expectations, its weaker-than-expected guidance for the year fueled concerns about consumer spending and economic stability, deepening market uncertainty.

Commodities

• Oil: Prices dropped to their lowest closing level this year after breaching a key technical support, accelerating losses amid the prospect of increased supply from Iraq. The potential rise in output weakened expectations of supply constraints that had previously supported the market.

• Brent crude fell 1% week-over-week, slipping below $74 per barrel, extending its losing streak to five consecutive weeks, the longest in over a year. Meanwhile, OPEC+ is considering postponing its planned 120,000 barrel-per-day output increase, which would mark the fourth delay in its efforts to restore production halted in 2022. The alliance currently plans to gradually add back 2.2 million barrels per day in monthly increments, starting in April.

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