Eyes on PMIs and the German Federal Election this Sunday

In focus today

The key PMI index for February is scheduled for release today across most major economies. Our focus will be on the data from the euro area in particular. The rise in euro area manufacturing PMI from 45.1 to 46.6 in January was welcome news after the weak second half of 2024. We expect the February PMIs to show roughly unchanged manufacturing PMI at 46.8 while activity is expected to have continued to rise in the service sector, with services PMI projected at 51.6.

In Denmark, we receive the business sentiment indicator for February. Despite a decrease in sentiment in January, the outlook still pointed towards moderate progress in 2025, with a clear expectation of increased hiring. We also receive payrolls data for December 2024. This data has shown growth throughout 2024, and the business sentiment indicator suggest that this continues in December.

Over the weekend, the German federal election takes place. A key theme is how to revive the ailing economy, meaning the outcome could have substantial implications for future growth. The most likely result of the German election is a coalition between the conservative CDU/CSU and the Social Democrats (SPD) 'Grand Coalition' or the Greens 'Black-Green'. In both cases with CDU's Friedrich Merz as chancellor. We estimate a 50% probability of a reform of the 'debt brake', which could allow an increased structural deficit, potentially boosting GDP growth over the coming years significantly. In absence of a reform, similar fiscal stimulus would likely come from targeted off-budgets funds. For details, see Research Germany - Limited economic impact of German election, 6 February. 

Economic and market news

What happened overnight

In Japan, Core Nationwide Consumer Prices Index (CPI) Ex Fresh Food came in slightly above expectations at 3.2% y/y (cons: 3.1% y/y). The increase in CPI is welcome news for further rate hikes, as BoJ Governor Kazuo Ueda mentioned additional rate cuts are contingent on continued improvements in the price outlook. He also indicated that the central bank is prepared to increase its purchase of government bonds if there is a significant rise in long-term interest rates.

What happened yesterday

In Denmark, consumer confidence data for February dropped to -14.5 from -11.7 in January. The weak data is likely due to concerns about the Danish economy and uncertainty surrounding President Trump's impact. Despite this, Danes view their personal finances more positively, thanks to rising real wages, a strong job market, and a stable housing market.

GDP rose by 1.6% in Q4 and 3.6% overall for 2024, largely driven by the pharmaceutical industry. Excluding pharmaceuticals, growth would have been 1.8%, with private consumption up by only 0.9%. Despite modest underlying growth similar to Europe, optimism for 2025 is buoyed by rising real wages and falling interest rates.

In the euro area, consumer confidence rose to -13.6 (cons: -14.0) in February from -14.2 in January. This marks the second month in a row with slightly improving consumer confidence, a positive development following the large decline we saw in November and December. Still, confidence remains significantly lower than in October. Consumers are likely concerned about the potential impact of President Trump's policies on Europe, which could negatively affect consumption this year. This is despite improving economic fundamentals for households, such as rising real incomes, higher employment, and declining interest rates.

Equities: Risk appetite continued to fade on Thursday. Europe started the session higher but came down at the US opening bell. S&P and Stoxx -0.5%, small cap Russell 2000 -0.9%. This takes European equities lower week-to-date for the first time since early January. As noted earlier this week, European outperformance is now consensus which means we need solid macro evidence that Europe is indeed turning around, in order for the rally to continue. In this respect, PMIs later today are crucial. Defensives outperformed cyclicals with health care and utilities in the lead, financed by cyclicals and banks. Chinese equities against the tide this morning with strong Alibaba earnings lifting the Hang Seng index 3%. US futures a notch lower.

FI: Last night, Fed's Kugler was hawkish as she said that downside risks to employment have diminished and that there is 'some way to go' on inflation with upside risks remaining. Today's highlight is the PMIs. We do not expect them to change the March ECB decision, albeit with the positioning ahead of the Q2 and later ECB meetings, we take note on those meetings on strong PMI deviations.

FX: Yesterday saw broad USD weakness across the G10 space despite a risk-off backdrop. EUR/USD edged higher toward 1.05 as markets shift their focus to today's PMI figures. USD/JPY set new YTD lows below 150, with JPY emerging as the clear outperformer in G10 so far this week. EUR/GBP continues to consolidate below 0.83. In the Scandies, EUR/SEK remains well below 11.20, while EUR/NOK edged higher to 11.65.