Issue #55: Mar'25 week 9

Block 1. Key Indices/Instruments

Block 2: Summary and Macroeconomic Overview

The table above shows that broad U.S. equity indices faced continued sell-offs, with the steepest declines for the second consecutive week in the technology and semiconductor sectors: XLK and SOXX dropped by -5% and -8%, respectively. The Magnificent 7 fell nearly 7%, with NVDA down 11%, AMZN down 6%, and GOOG down 5%. Defensive sectors (XLP, XLV) remained largely unchanged, while equal-weighted indices showed comparatively smaller declines.

In contrast, the bond market surged, with a notable downward shift in yields—particularly after the release of the Atlanta GDPNow estimate, which dropped to -2.8%. Futures markets now price in three rate cuts for 2025.

Key event ahead: U.S. labour market data release on 7 March.

U.S. manufacturing activity on the brink of stagnation: tariff pressures and rising costs

U.S. manufacturing activity nearly stalled in February, as reflected in the Institute for Supply Management (ISM) data. The manufacturing PMI declined by 0.6 points to 50.3, barely staying above the expansion threshold of 50.

The key factors weighing on the sector were falling orders, declining employment, and a sharp rise in raw material costs—the highest since June 2022. Increasing input costs pose a serious challenge for manufacturers amid weakening demand.

Rising uncertainty over tariff policies under the Trump administration is forcing businesses to reconsider plans and scale back operations. This is particularly evident in industries such as chemicals, transport equipment, and machinery manufacturing.

The ISM price index surged by 7.5 points to 62.4, indicating intensifying inflationary pressure at the early stages of the production cycle. However, it remains uncertain whether manufacturers will be able to pass these rising costs onto consumers.

While steel and aluminium prices have already risen following new tariff announcements, some suppliers are refusing new orders due to disputes over who should absorb the additional costs.

Industry representatives point to tariffs as a key source of instability. For instance, chemical and transport equipment manufacturers report order suspensions, while food, beverage, and tobacco companies highlight declining sales due to price pressures.

Economic impact: lower GDP forecasts

Additional data revealed that U.S. construction spending fell by 0.2% in January, likely adding further pressure on the economy. The Atlanta Fed now projects U.S. GDP growth for Q1 at -2.8% on an annualised basis, reflecting a sharp decline in residential investment.

The key takeaway is that uncertainty over tariffs and rising raw material costs could create conditions for stagnation in the manufacturing sector. While inflation expectations are mounting, it remains unclear whether businesses can pass these costs onto consumers.

Block 3. EU Update

European equities outperform as defence sector drives gains

Over the past week, European stock indices posted strong gains, with Germany’s DAX leading the rally. Since the start of the year, European markets have significantly outperformed their U.S. counterparts.

Once again, the key driver was the defence sector, with stocks such as Thales (HO FP), Rheinmetall (RHM GY), Airbus (AIR FP), and Leonardo (LDO IM) leading the charge. Investors anticipate a substantial increase in defence spending (+1.5% of GDP) and greater European defence sector autonomy.

Meanwhile, sovereign bond markets remained largely unchanged, even though previous rallies in defence stocks were accompanied by rising bond yields, reflecting expectations of increased debt issuance to finance the sector.

Inflation eases, strengthening ECB rate cut prospects

February saw a decline in Eurozone inflation after months of increases. The Harmonised Index of Consumer Prices (HICP) fell to 2.4% year-on-year, down from 2.5% in January. Notably, inflation in the services sector eased to 3.7% from 3.9%, a crucial indicator linked to domestic cost pressures.

This decline reinforces expectations of a 25bp ECB rate cut in March, followed by a further 50bp reduction over the course of the year. A sustained drop in services inflation could give the ECB more confidence to accelerate monetary easing.

Trade tensions pose a risk to growth

A potential trade war with the U.S. remains a major risk for the Eurozone economy. Rising import costs alongside weak growth could create a policy dilemma for the ECB, making aggressive rate cuts less likely.

Overall, the combination of falling services inflation and sluggish economic growth increases the likelihood that the ECB will target a neutral interest rate around 2%. The upcoming ECB meeting on 6 March is expected to bring a 25bp rate cut, lowering the key rate to 2.65%, in line with analyst consensus.

Block 4. Great Britain

UK equities mixed as FTSE 100 hits record high

Over the review period, UK equity indices showed mixed performance. While the FTSE 250, with its higher exposure to the domestic market, saw a slight decline, the FTSE 100 reached a historic high. However, the gains were not broad-based but driven primarily by the Aerospace & Defence sector amid reports of increased funding. BAE Systems (BA LN) and Rolls-Royce Holdings (RR LN) surged 17.42% and 28.16%, respectively, over the week.

Sovereign bond yields edged lower, with one-year yields dropping sharply in anticipation of more aggressive rate cuts in 2025.

Mortgage approvals signal short-term housing market strength

In January, UK mortgage approvals reached 66,200, slightly below December’s 66,500 but above the 10-year average of 65,000. This suggests house prices may rise in the coming months, despite high interest rates and affordability challenges.

The key driver of housing market activity is buyers rushing to complete transactions before property tax increases in April 2025. This temporary demand boost is expected to support prices in the short term.

Long-term outlook remains cautious

• Transaction activity is likely to decline as borrowing costs remain elevated.
• Even after the BoE’s third rate cut, reducing rates to 4.5%, 2-year and 5-year swap rates remain high, keeping pressure on household affordability.
• 2025 mortgage refinancing wave: Around 1.2 million homeowners will need to renegotiate their mortgages. 2-year fixed-rate borrowers may see modest relief from lower rates.5-year fixed-rate borrowers could face significantly higher monthly payments.

Disclaimer:

This information serves as a snapshot of market trends and does not constitute financial advice. Always conduct thorough research or consult with a financial advisor before making investment decisions.