Sentiment Stays Shaky As US Data Disappoints Again

WHERE WE STAND – This week brings three key tests for the US economy, and whether the ‘growth scare’ narrative that has gripped markets of late is justified. Thus far, it’s 0 for 1 in terms of those worries being soothed.

February’s ISM manufacturing survey was undeniably a grim read, with the headline figure falling to 50.3, below consensus expectations, and just a whisker above the key breakeven mark between expansion and contraction. The details of the report weren’t much better, with the prices paid index rising to its highest since June 2022 at 62.4, while both the new orders and employment metrics slipped below the 50 handle. In short, that’s a stagflationary report, that shows a dash to import before tariffs take effect, but little hope for the sector once they are in place.

Clearly, in an environment where participants are seeking reassurance that current macro concerns are overblown, yesterday’s figures were about as bad a data slate as you could ask for. Naturally, this raises the stakes for both the ISM services print on Wednesday, and the jobs report on Friday. In any case, dents in the ‘US exceptionalism’ narrative are growing ever larger in number.

Markets, hence, have priced a more dovish path for Fed policy, with the USD OIS curve now discounting 65bp of easing by year-end, up from about 40bp a fortnight ago. This pricing makes sense to me, and is essentially the market believing the December dots, which pointed to 50bp of cuts, while adding on top a 15bp premium for ‘something bad happening’. Pricing three 2025 cuts feels a bit of a stretch for now, but that downside risk premium will surely increase if the rest of this week’s key datapoints also come in soft.

Anyway, while the data may still be rather downbeat, it is at least keeping my bond bull case intact, with the risk/reward continuing to favour Treasury longs, on the premise that it’s much easier to envisage the Fed cutting aggressively, than it is to envisage them tightening in such a manner. Benchmark 2-year yields dipped back under 4.00% yesterday, while 5-year yields also slipped beneath that figure, as Treasuries rallied across the curve post-ISM mfg.

I must admit, though, that I am getting a bit more concerned about my bullish equity stance, particularly as the market remains in a ‘bad news is bad news’ mindset, whereby a rise in jitters over the state of the US economy is used as a catalyst to de-risk, as opposed to causing a focus on a potentially more dovish Fed stance. Add on top the Trump Admin doubling-down on trade and geopolitical hawkishness, right as data softens, without the comfort blanket of a Fed put, and you have a pretty grim short-term cocktail for equities to contend with.

Notably, back in FI, those Treasury gains were in contrast to the broader softness seen across DM Govvies yesterday, with both Gilts and Bunds selling off aggressively, as the respective 10-year benchmarks both rose over 10bp intraday. Naturally, this comes as the market braces for a sizeable increase in defence spending, and ramping up of issuance to fund it, which also gave European defence names a fillip in yesterday’s session, taking the DAX to a daily gain of well over 2%. While nothing in markets is assured, long defence names seems like the most logical bet for the time being.

As EGBs sold off, US-RoW spreads tightened dramatically, with the 10-year Treasury-Bund spread tumbling below 170bp, to its narrowest since early-October. Couple this with increased doubt being cast on the sustainability of the US economic expansion amid the Trump Admin’s hawkish trade and geopolitical stances, and you have a pretty strong mix to force the dollar lower.

That’s exactly what happened yesterday, with the DXY giving up the 107 handle, and notching its worst day in a month. This, in turn, took the EUR back to the 1.05 figure, while also allowing cable to poke its head back above 1.27, as other G10s rallied in unison.

The common currency was also boosted by hotter-than-expected February ‘flash’ CPI figures, where headline inflation rose 2.4% YoY, and core inflation rose 2.6% YoY. Importantly, though, both of these prints were 0.1pp below the January figure, while services inflation also fell to 3.7% YoY, its slowest pace since last April. This data certainly won’t be a game-changer for the ECB, with a 25bp cut still on the way on Thursday, though may give the hawks some ammunition to ditch the “restrictive” label that continues to be assigned to the overall policy stance.

LOOK AHEAD – A quiet day ahead on the data docket, though focus will naturally fall on the issue of trade, with 25% US tariffs on both Canada and Mexico having now gone into effect, as well as an additional 20% levy on Chinese imports. Responses to these measures are likely to dominate the narrative over the session ahead.

Elsewhere, January’s eurozone unemployment figures are the only release of note, while the earnings slate is also rather barren, with pre-market figures from Target (TGT) the sole highlight.