Weekly focus: Trade war escalation weighs on markets

An intensifying trade war weighed on risk appetite in a week when particularly US equities traded lower still. The dollar stabilised at the new much weaker levels and global yields largely traded sideways. US steel and aluminium tariffs took effect, and the EU Commission responded with a range of countermeasures, including jeans and bourbon tariffs, but also highlights that they would prefer to remove them and find a solution with the US. The measures cover around 5% of total EU exports to the US and thus should have limited direct macro impact. In an uncertain world, gold prices tested new highs this week.

After a possible US recession has been gradually priced back into markets, some largely uplifting data was welcome, with inflation pressures moderating in February as core CPI declined to 0.2% mom, a relief for the Fed and markets not least with the recent surge in consumers' inflation expectations in mind. The number of job openings ticked a bit higher again in January, and jobless claims declined slightly despite the concerns related to federal layoffs, both confirming the solid picture of the labour market we got with the jobs report for February. The NFIB business survey revealed another sentiment decline among small US businesses with the uncertainty index climbing to the second highest level on record since the 70s. That said, business sentiment remains above levels prior to the presidential election.

Some positive data signs are also worth noting on our own continent. The ECB wage tracker continues to indicate slowing wage growth and thus price pressures, while the Sentix index, which has been a good indicator of PMI directions recently, surprised to the topside, indicating further improvement in economic activity over the recent month.

In Japan, the Shunto, spring wage negotiations, came off to a strong start as many of the big corporates decided to fully meet their labour unions' quite high wage demands. Strong wage growth is a prerequisite for further rate hikes from the Bank of Japan. We expect them on hold on Wednesday, though, not least supported by the recent yen strength.

We also have the Bank of England (BoE) and the Fed on hold. On the FOMC meeting, all eyes will be on the communication on the outlook for further rate cuts as well as the updated rate and economic projections. The Fed could also provide signals about further tapering or even completely ending QT over coming months. We think the BoE will stick to its previous guidance of gradual removal of policy restraint. Swiss inflation remains muted, which is also why we expect a 25bp rate cut to 0.25% from the SNB.

On the data front, we kick off the week with key Chinese housing data for both January and February. We will also look out for retail sales in China and in the US. We can draw no conclusions on the German fiscal package yet, as the CDU/CSU, SPD and The Greens have yet to agree. We will also look out for the votes in the Bundestag and Bundesrat (Upper House) on the German fiscal package.

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