January Growth Indicates German Industry May Have Hit Bottom

Economic

Summary:

Finally some good industrial news out of Germany as industrial production rebounded in January. Another data point confirming the current bottoming out of the industrial slump but not yet a sign of any significant turnaround

German industry started the year on a more positive note, increasing by 2% month-on-month in January, from -1.5% MoM in December. On the year, industrial production is still down 1.6%. At the same time, the frontloading of exports, anticipating looming tariffs, stopped as German exports dropped 2.5% MoM in January. As imports increased by 1.2% MoM, the trade surplus narrowed. German industrial production remains about 10% below its pre-pandemic levels some five years after the onset of Covid-19.

Bottoming out of industrial slump

Today's data confirms the bottoming out of Germany’s industrial slump. However, it is too early to call any substantial turnaround. Manufacturing capacity utilisation is at lows comparable only to those seen during the financial crisis and the initial lockdowns, order books shrank again in January with particularly weak foreign demand, and inventory levels remain at elevated levels. This still paints a rather unflattering picture of a nation known as an industrial powerhouse.

With looming US tariffs on the EU and the expected modern version of ‘beggar-thy-neighbour’ policies by the new US administration, the short-term outlook for German industry remains anything but rosy. This is not just because of the potential impact on German exports, but more so the effect on German investments if companies were to move production to the US. It is hard to see that last week’s fiscal big bang from the potentially incoming government will be able to lead to an immediate turnaround. However, if the announced stimulus is indeed delivered, it could provide a short-term confidence boost, and enhance the longer-term prospects of the German economy.

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Economic

The CDU/CSU and SPD have until 25 March to get their fiscal stimulus package and the necessary amendments to the debt brake approved by parliament. As the deadline approaches, stumbling blocks have begun to emerge.

At the end of a historic week for Germany, which started with the announcement of a €500bn investment fund, changes to the debt brake to allow for higher defence spending, and the removal of the balanced-budget restriction for state governments, the CDU/CSU and SPD have already presented a draft law.

This draft law proposes official amendments to the German constitution and consolidates all proposed changes into a single bill. Consequently, the final vote will be an all-or-nothing decision. To change the Constitution, a two-thirds majority in both parliament and the Federal Council is required. The draft law will be debated in parliament this upcoming Thursday and voted on Tuesday, 18 March.

The inaugural session of the newly elected parliament is set for 25 March. It's important to note that the CDU/CSU and SPD lack a two-thirds majority and thus rely on support from other parties, ideally the Greens. While no date has been set for a vote in the Federal Council, the majorities there are unlikely to shift quickly. However, in the Federal Council, the CDU/CSU and SPD also lack a two-thirds majority and depend on the Greens, which sit in several state governments together with either CDU/CSU or SPD.

Possible stumbling blocks are getting bigger

Over the weekend, three influential Green politicians (and members of three state governments) argued that they couldn’t support the current draft law. In short, they are calling for stricter controls to ensure that investments are targeted, and they would only like to see defence spending of more than 1.5% GDP (instead of 1% GDP) to be excluded from the debt brake.

This is the expected pushback and shows that the coming days will bring more political excitement out of Germany. Let’s also not forget that not everyone at the CDU/CSU will be happy with the U-turn the party took on the debt brake, having campaigned against any changes and now going all in. The desire to lead the next government, however, will probably be stronger, leaving the Greens as the potential stumbling block.

CDU/CSU and SPD have presented the first outline of a possible coalition agreement

On Friday, the CDU/CSU and SPD presented the results of their informative talks, revealing an outline of a potential coalition agreement. However, this has led to increased obstacles.

While the speed and efficiency demonstrated by the three parties, led by the likely next German chancellor, Friedrich Merz, is impressive, the paper raises many additional financing concerns. In short, the paper is more a collection of (sometimes) good intentions rather than a coherent strategy to radically enhance German competitiveness.

For instance, the three parties aim to attract new industries while maintaining the automotive sector's key role. They propose reducing the electricity tax and constructing new gas power plants. Other measures include tax relief through income tax reform, higher subsidies for commuters, tax incentives for corporate investments, and a reduced VAT for restaurants. Additionally, they suggest a higher minimum wage without altering the retirement age, among other proposals.

Why is this paper now an obstacle? Because it will worsen the next government’s financing problems as it is a long list of costly policy measures with very few proposals to cut expenditures elsewhere. As a consequence, there is a risk that the €500bn infrastructure investment fund will be ‘repurposed’ for more consumptive than investment expenditures. Therefore, it makes sense to have stricter controls to ensure that the infrastructure money is targeted. Something the CDU/CSU and SPD could still include in a revised draft law after Thursday's discussion.

Historic fiscal stimulus could come but reform agenda still missing

All in all, last week brought back optimism to the German economy. The swiftness with which the potential coalition partners agreed on a historic fiscal stimulus package and a preliminary coalition agreement has been impressive. And a welcome change compared to the almost endless coalition talks in other European countries. It shows that the parties, or at least the politicians involved, have understood that they have no time to lose and need to leave personal and political interests behind. So far, they have.

The outline paper presented on Friday, however, suggests that there is still a long way to go to combine new fiscal stimulus with a real reform agenda. While targeted additional spending aimed at improving competitiveness can only be celebrated, there is an increasing risk that the incoming government could repeat the mistake of the former government: trying to mask political differences with money that isn’t there.

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Economic

Japan's economy expanded in the October-December quarter at a slower pace than initially reported, weighed by weaker consumption but still likely supporting the case for further interest rate hikes.

At the same time, government officials and analysts expressed concern about risks from US President Donald Trump's tariff policies and soft consumption affected by higher prices.

Gross domestic product (GDP) expanded an annualised 2.2% in the three months to December, the Cabinet Office's revised data showed on Tuesday, slower than the 2.8% growth in the initial estimate and economists' median forecast.

The revised GDP numbers translate into a quarter-on-quarter expansion of 0.6% in price-adjusted terms, compared with 0.7% growth issued in February. The softness in consumption was also seen in much weaker-than-expected household spending data released on Tuesday.

"There wasn't any significant change, so I don't think it will have any impact on changing people's perceptions of the economy," said Kazutaka Maeda, an economist at Meiji Yasuda Research Institute.

"If you look at GDP on its own, I don't think it will prevent the Bank of Japan (BOJ) from raising interest rates."

The BOJ raised short-term interest rates in January to their highest in 17 years, and growth momentum in the world's fourth-largest economy will be among key factors determining how fast it continues to tighten policy.

The capital expenditure component of GDP, a barometer of private demand-led strength, rose 0.6% in the fourth quarter, revised up from a 0.5% expansion in the initial estimate. Economists had estimated a 0.3% rise.

Private consumption, which accounts for more than half of economic activity, was unchanged versus the preliminary reading of 0.1% uptick.

External demand, or exports minus imports, contributed 0.7 of a percentage point to growth, unchanged from the preliminary reading. Domestic demand shaved 0.2 of a percentage point off.

Japan's economy minister Ryosei Akazawa warned of a hit to consumption from sustained food cost increases and downside risks from overseas, including US trade policy.

"The uncertainties (from Trump's policies) have heightened from December or January," said Uichiro Nozaki, an economist at Nomura Securities.

A barrage of new Trump policies has increased uncertainty for businesses, consumers and investors, notably back-and-forth tariff moves against major trading partners like Canada, Mexico and China.

If tariffs are deployed, that would have an impact on the economy, which would have repercussions on financial markets and monetary policy, Nozaki said, adding that "we need to wait and see" how the BOJ views those factors.

Separate data from the internal affairs ministry showed household spending rose 0.8% in January year-on-year, well below the market estimate for a 3.6% jump in a Reuters poll.

On a seasonally adjusted, month-on-month basis, spending dropped 4.5%, bigger than an estimated 1.9% decline.

Source: Theedgemarkets

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Economic

We expect a 25bp rate cut by the Bank of Canada on 12 March, taking the policy rate to 2.75%, in line with market pricing. Despite strong fourth-quarter GDP growth, the US-Canada trade spat is fuelling recession concerns and we currently forecast another cut in the second quarter. We also expect the Canadian dollar to face more downside risks this spring

Recession fears rising

In the wake of weak growth, rising unemployment and subdued inflation, the Bank of Canada has cut its policy interest rate by 200bp over the past 10 months and is expected to follow up with another 25bp cut on Wednesday. This is despite surprisingly strong fourth-quarter annualised GDP growth of 2.6%, which was boosted by a temporary sales tax holiday that incentivised consumers to bring forward spending. Evidence from January suggests a return to the previous trend, and with the US in the process of implementing tariffs on imports from Canada, there are intensifying concerns about recession.

In a recent speech, Governor Tiff Macklem stated that “the economic consequences of a protracted trade conflict would be severe" with BoC models suggesting that the economy contracts as exports fall by around 8.5% before steadying and then returning to growth “but on a path that is about 2½% lower” than it assumed in January. After all, 76% of Canadian exports go to the US, equivalent to 20% of Canadian GDP.

Another insurance cut looks warranted

For now, Canada is in a state of reprieve with US President Donald Trump signing executive actions that delay the implementation of tariffs on products covered by the North American USMCA free trade treaty. However, with President Trump claiming he believes that trade tariffs can help reinvigorate the US economy whilst also raising much-needed tax revenues, the probability remains high that there will be a negative impact from trade protectionism.

Canada has already introduced tariffs on CAD$30bn of imported US products, and this will lift prices for items such as orange juice, appliances and motorcycles, but given that unemployment is 6.6% and inflation is broadly in line with the target, we believe the BoC has scope to implement another insurance rate cut.

Markets are fully pricing in a 25bp cut, but economists are more split, with 17 out of 25 economists expecting a 25bp cut and eight expecting no change to the overnight rate. We think the pace of cuts will slow after next week’s move and forecast just one further rate cut coming in the second quarter.

Canada's inflation and unemployment

Bank of Canada Preview: Another Cut as Tariffs Cloud Outlook_1

CAD: Downside risks still dominate

USD/CAD has been settling around 1.43-1.44 after Trump’s second postponement of 25% tariffs. Current trading levels embed around 2% of risk premium into CAD. That is only half of the peak risk premium in early February (4%), and USD/CAD is now also embedding a markedly more dovish view on Fed cuts.

Our view for the coming months is that downside risks for CAD remain in place. Even without a flat 25% tariff, Canadian goods are being selectively targeted by the US, and once the “reciprocal tariff” phase kicks off in April, Canada should be disproportionately affected due to its high export volumes to the US.

As we expect the US dollar to appreciate into the summer on the back of US tariffs, USD/CAD can find support beyond the 1.45 level before easing back towards the low 1.40s in late 2025, when US protectionism may start to be scaled back.

To stay updated on all economic events of today, please check out our Economic calendar

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Economic

Germany's fiscal plans have hit first stumbling blocks, but markets assume the change in the German fiscal attitude sticks. The front end of the EUR curve is held up by tariff uncertainty, but the path is to a 3% handle for 10y Bunds. US Treasuries are not reacting to this, but to elevated domestic angst on a complex policy prescription laced with uncertainty

US Treasuries remain enamored by 4% as a target for the 10yr

Severe risk-off and elevated volatility characterised a rough day for US markets. No Monday crash here, but certainly a slow-grind move south, extending from preliminary weakness last week. Only one way to go for US Treasureis on the back of this, as the 10yr homed in on the 4.2% area. The dominant driver here is a self-harming process coming from the complex policy prescription being shown to the markets, and the back story is one of a resurgent Europe versus a more isolated United States, or the perception thereof. Whether this sticks remains to be seen, but it's a theme that's likely to persist a bit until or unless negated by events or new information.

For the US 10yr yield, there is a natural tendency for the 4% area to be aimed for, especially given the latest mood music. Room is gradually being made for a test lower as the Fed funds future strip continues to edge lower. At the beginning of the day the terminal rate was in the 3.5% area. It's now approaching 3.25%. At the same time the 10yr swap spread has been on a re-widening tendency, acting to limit the full feed-through of the deeper rate cut expectation on the 10yr yield. This, plus the new found resilience out of Europe, is dampening the extent of movement in the 10yr yield to the downside.

For the 10yr yield to get and stay through 4%, there would need to be an even deeper rate cut discount, one that verges on outright recession. We're not quite on that wavelength yet, but watching it carefully.

Despite hitting first stumbling blocks, the German fiscal rethink sticks with long-end rates

The 10yr Bund started the week with yields retracing slightly back towards 2.8%, but that is still up 40bp versus the end of February. Where we are still seeing the repercussions of the European defence rethink and Germany’s turnaround on fiscal conservatism play out further is in the curve itself and the decoupling of US and EUR long-end rates. The 2s10s EUR swap curve has even managed to slightly extend its steepening from last week to now stand at 37bp. The 10yr US Treasury-Bund spread has now narrowed to below 140bp on Monday coming from 184bp at the end of February.

The EUR short end is still looking at the European Central Bank with a degree of caution, though. A terminal rate at 2% still seems to be the base case – or better the market's middle-ground – in light of uncertainty surrounding especially US tariffs on EU imports even as it seems to be desensitised to tariff headlines given the US administration's back and forth on the topic. Terminal rate pricing is up by about 15bp versus end-February, but was up by more than 20bp briefly over the past few sessions. However, even those levels were not unprecedented this year – one only needs to go back to late January. After listening to Lagarde last week, our economists think the ECB may well stop easing at a deposit facility rate of 2.25%. But this scenario will need more clarity, also on the implementation of German spending plans.

10yr Bund yields – and more relevant here – spreads over swaps have shown a limited reaction to the headlines as Germany’s proposed package of a €500bn infrastructure funds and debt brake reform hit the first stumbling block on Monday. While this suggests markets are in a waiting mode, the moment of imminent 'peak supply fear' also seems to have passed. At the same time there is also the sense there is no turning back from the change in German fiscal attitudes in a more general sense, allowing the levels to stick.

But if the market's ECB pricing were to move higher on more clarity that stimulus will pass in the coming two weeks, then the path for 10yr Bund yields to move towards 3% would become much clearer.

Tuesday’s events and market view

The data calendar is light on Tuesday with the main event the US JOLTS job openings data for January. On the EUR side, headlines surrounding the passage of the German fiscal package will remain at the centre of attention. We will also be listening to the ECB’s Rehn speak on the economic outlook and monetary policy. The EcoFin meeting of EU finance ministers will also be attended by the ECB’s VP de Guindos.

In primary markets the EU syndicated sale of a new 10yr benchmark will be the main event with an anticipated volume of around €7bn. Germany will also auction 2yr bonds for €4.5bn. Outside EURs, the UK sells a new 25yr gilt linker via syndication and the US will auction new 3yr notes ($58bn).

To stay updated on all economic events of today, please check out our Economic calendar

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Economic

Korea's top envoy for international investment cooperation has called for the enhancement of bilateral industrial cooperation with the United States in advanced industries during his ongoing visit to Washington, Seoul's industry ministry said Tuesday.

Choi Joong-kyung, ambassador for international investment cooperation, made the call during a seminar on industrial cooperation between Korea and the U.S. with the Heritage Foundation, a major think tank based in Washington, according to the Ministry of Trade, Industry and Energy.

Choi has been on a trip to the U.S. since Feb. 28 to seek ways to bolster bilateral cooperation in various industries amid rising concerns over the Donald Trump administration's push for a new tariff scheme.

In the seminar, Choi called for advancing bilateral cooperation in six major sectors — shipbuilding, defense, artificial intelligence (AI), nuclear power plants, energy and batteries.

The two countries will be able to strengthen their competitiveness in the global market if they can integrate the U.S.' cutting-edge technologies and Korea's manufacturing infrastructure, Choi said, according to the ministry.

He also stressed the need for consistency in U.S. policies, such as the CHIPS Act and the Inflation Reduction Act, to create an environment for continued investment by Korean firms in the U.S.

The ministry said Choi plans to visit five other major U.S. think tanks and institutions, including the U.S. Chamber of Commerce and Peterson Institute for International Economics, this week as part of efforts to bolster bilateral industrial cooperation.

Source: Koreatimes

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FastBull Featured

Daily News

[Quick Facts]

1. Canada retaliates against U.S. tariffs amid escalating trade war.

2. Japan's Q4 GDP revised downward, yet supports rate hike expectations.

3. Germany's defense spending plan triggers sovereign bond sell-off.

4. NY Fed Survey: Consumers grow pessimistic on economy, but long-term inflation expectations hold steady.

[News Details]

Canada retaliates against U.S. tariffs amid escalating trade war

On March 10, David Eby, the Premier of British Columbia, Canada, announced that all U.S.-made alcoholic beverages would be removed from shelves in the province's liquor stores. Eby stated that this move was in response to the United States' ongoing threats to impose additional tariffs on Canadian goods entering the country, as well as President Trump's intention to redraw the Canadian-U.S. border. He added that legislative tools are being employed to counter the impending steel and aluminum tariffs.

Additionally, on March 10, Ontario, Canada's largest economy, declared that it would impose a 25% tariff on electricity exports to the United States. This measure is part of Canada's broader retaliatory response to the tariffs imposed by President Trump on Canadian goods. Ontario officials noted that the new tariffs would increase the cost of electricity exports to the U.S. by approximately CAD 10 per megawatt-hour. The U.S. states importing electricity from Ontario include New York, Michigan, and Minnesota, among other border states, serving around 1.5 million customers. Ontario Premier Doug Ford indicated that households and businesses in these states could see their monthly electricity bills increase by CAD 100.

Japan's Q4 GDP revised downward, yet supports rate hike expectations

Japan's economic growth in the fourth quarter was revised downward, but it still marked the third consecutive quarter of expansion. The latest data shows that the country's real GDP grew at an annualized rate of 2.2% in the final quarter of 2024, down from the initial estimate of 2.8%. On a QoQ basis, Japan's economy expanded by 0.6%, driven by a 0.6% increase in capital expenditure, which was revised up from the initial estimate of 0.5%. However, private consumption was revised down from 0.1% to 0.0%, reflecting a slowdown in consumer spending.

Despite the slower recovery than previously anticipated, the sustained economic growth could support expectations that the Bank of Japan (BOJ) may raise interest rates again in the near future. However, risks remain, including potential disruptions to business activity from U.S. President Trump's economic policies, such as higher tariffs. Exports were the main driver of Japan's Q4 economic growth, with net external demand (exports minus imports) contributing 0.7 percentage points to GDP growth.

Germany's defense spending plan triggers sovereign bond sell-off

German government bonds experienced their worst selloff in over 20 years last week, with long-term bonds facing significant selling pressure. This turmoil has given new momentum to one of the bond market's most popular trades in Europe: the "curve steepening trade." This strategy bets on long-term bonds underperforming short-term debt. The market movement intensified after Germany announced plans to invest hundreds of billions of Euros in defense and infrastructure, leading to a sharp rise in bond yields.

Specifically, the spread between 2-year and 10-year German bond yields saw its largest increase in two years, reflecting investors' expectations of higher inflation and stronger economic growth driven by increased government spending.

NY Fed Survey: Consumers grow pessimistic on economy, but long-term inflation expectations hold steady

According to the latest monthly survey report released by the Federal Reserve Bank of New York, consumers' median inflation expectations for the next year rose slightly from 3.0% in January to 3.1% in February. Meanwhile, inflation expectations for the three-year and five-year horizons remained unchanged at 3.0%, indicating a stable long-term outlook.

The survey also highlighted that Americans expect faster price increases for gasoline, food, medical care, and rent. Consumers' overall economic sentiment has become more cautious and anxious, with notable deterioration in expectations for unemployment, delinquency, and credit access.

In contrast, the University of Michigan's consumer survey, another key indicator of inflation expectations, reported a significant increase in long-term inflation expectations. The five-year inflation expectation final value for February soared to 3.5%, the highest since 1995, while the one-year expectation reached 4.3%, the highest since November 2023.

The substantial gap between the New York Fed and University of Michigan surveys has raised questions among policymakers. "Timely Louss," often referred to as the "New Fed Communications," noted that the sharp rise in inflation expectations observed in the University of Michigan survey was not reflected in the New York Fed's February consumer survey. The stability of medium- and long-term inflation expectations is a positive signal for Federal Reserve policymakers, who closely monitor these indicators. Inflation expectations are crucial because policies from the Trump administration, such as immigration restrictions and tariffs on major trading partners, could slow economic growth and exacerbate inflationary pressures. Federal Reserve officials have indicated that if long-term inflation expectations remain stable, they may choose to overlook price increases resulting from tariffs.