German fiscal package anticipated to secure Bundestag approval

In focus today

Today, the German fiscal package is scheduled to be passed in the Bundestag and on Friday in the Bundesrat, 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 provide their support in the Bundesrat on Friday.

In the US, President Trump has announced that he will be speaking with Russian President Putin about ending the war in Ukraine. The talk will presumably be on land concessions by Ukraine along with powerplants as mentioned by President Trump previously. Ukraine has already agreed to a 30-day ceasefire proposal.

Overnight, the Bank of Japan will conclude a two-day policy meeting with a rate decision. Anything but hold would be a big surprise after the January rate hike, trade war tensions and a stronger yen, which will serve to dampen imported inflation. With the outlook for another significant wage bump this year, we anticipate the BoJ will find room to hike rates again over the summer.

Economic and market news

What happened overnight

In the Middle East, Isreal launched its largest attack since the ceasefire in January, striking multiple Hamas targets. The strikes are a response to Hamas's refusal to release the remaining hostages, according to the office of Israeli Prime Minister Netanyahu. The US White House was consulted prior to the strike.

What happened yesterday

In the US, February retail sales data sent mixed signals. Retail sales control group was up 1% (cons: 0.3%) compared to -0.9% in January. On the flip side, headline retail sales growth remained weak in February at 0.2% m/m SA from -0.9% in January. Excluding the most volatile categories improved the picture, with control group sales growth accelerating to 1.0% m/m SA from -1.0%. However, unusually positive seasonal adjustment lifted the monthly growth rate significantly. Looking at the y/y growth rate of the non-seasonally adjusted series shows that control group sales growth actually slowed down quite a bit (+0.3% y/y, from +4.1%, see chart below). EUR/USD ticked slightly lower following the release.

In China, the data covering January and February was released. The data showed a decent start to the new year albeit still with a few weak spots. Industrial production surprised to the upside rising 5.9% y/y (cons: 5.3% y/y). The momentum in production explains the rise in metal prices recently. However, more importantly there were tentative signs of improvement to demand as this is the real driver of the economy. Retail sales increased 4% y/y (cons: 3.8% y/y). There is still some way up to the 7-8% pre-pandemic levels, though, and lifting private consumption is now the number one priority for the government.

Equities: Global equities were broadly higher yesterday, with some major US indices achieving the first two-day gain for the S&P 500 since it reached its record close on 19 February. This is certainly positive news, and we have already seen pundits suggesting the correction is over. It is remarkable how swiftly situations can reverse in the equity market and how quickly perspectives can change simply because Bloomberg screens shift from red to green. We would argue that we did not receive reassuring macroeconomic data yesterday; in fact, the opposite was true, and we still view 2 April as a crucial uncertainty deadline due to impending tariff increases.

Additionally, it is important to consider sector and regional performance from yesterday. Defensive stocks outperformed in the US, while the MAG 7 stocks significantly underperformed compared to the broader 493 index. Europe and Asia also outperformed, and the same trend is visible today in the futures and cash markets. In other words, some investors are attempting to buy the dip, a strategy that has been highly profitable over the past two and a half years. We continue to recommend exercising caution, as the combination of macroeconomic factors and politics has not yet demonstrated a positive outlook for the future. In the US yesterday, the Dow rose by 0.9%, the S&P 500 by 0.6%, the Nasdaq by 0.3%, and the Russell 2000 by 1.2%. In Asia, most markets are higher this morning, led by a new year-to-date high in the Hang Seng index. Conversely, Indonesia's economy is struggling, with growth fears leading to a sell-off and a temporary halt in trading this morning. European futures are higher ahead of the decisive voting in the Bundestag today. US futures are lower this morning.

FI&FX: Bond yields slipped on both sides of the Atlantic yesterday ahead of the vote on the German fiscal package today and on a relatively quiet day when risk sentiment held up amid solid retail sales data in the US. EUR/USD traded around the 1.09 level and the top from last week. EUR/SEK held steady just above 11.00 as the market digested the outlook for increased government borrowing amid a coming rise in defence spending.