Ukraine and US have agreed to terms on minerals deal

In focus today

Today, the EU Commission is set to publish its "Clean Industrial Deal", which is the Commission's grand strategy on how to revitalise manufacturing and meet climate goals. A leaked draft shows that the Commission intends to introduce "Made in the EU" quotas and carbon product labels. It focuses on reducing energy costs, stimulating demand, fostering investment, ensuring access to critical raw materials, developing global partnerships, and reskilling workers.

In Sweden, producer prices are released at 08:00 CET. While PPI consumer goods domestic supply usually aligns close with CPI, recent trends show rising PPI since October, while the CPI has moved sideways to lower. Somewhat simplified, this indicates a pressure on margins for companies. 

Economic and market news

What happened yesterday

On the geopolitical scene, Ukraine agreed to terms with the US on a minerals deal. The deal does not entail any US security guarantees or continued flow of weapons. However, the deal can be seen as part of a bigger puzzle, broadening relations with the US to strengthen Ukraine's prospects after three years of war, according to Ukraine's deputy prime minister and justice minister who led the negotiations. Zelenskyy is planning to travel to Washington on Friday to sign the deal. We are hosting a webinar tomorrow (27 February) from 09:30 to 10:00 CET with our analysis of the current situation. Please use the following link to attend the session: Webinar - The new security disorder in Europe - what are the economic implications?, 27 February.

In the US, the Conference board's sentiment survey mirrored the weakening seen in the University of Michigan's sample earlier. The forward-looking economic expectations declined, while labour market indicators, including the "jobs plentiful"-index, also weakened slightly. Inflation expectations climbed higher, increasing to 6.0% from 5.2%, which marks the highest level since May 2023. The marked surges in inflation expectations over the recent months likely reflect household's perception of tariffs' impact on inflation. We believe that the Fed will be sidelined in March and May, but still think the cutting cycle is far from over.

Turning to the Fed, Richmond Fed President Barkin (hawk and non-voter) stressed the need to remain cautious on inflation amid current uncertainty. Dallas Fed president Logan (hawk and non-voter) was also on the wire emphasizing that the Fed's balance sheet would work best when the maturities of its securities holdings roughly match with US Treasury issuances. Importantly, Logan noted that the Fed is not considering changes to its implementation framework.

In politics, the House of Representatives passed a budget resolution calling for trillions of dollars in tax and spending cuts, extending Trump's 2017 tax cuts, and delivering a massive boost to his 2025 priorities. The vote on the resolution was 217-215. The deal proposes USD 4.5tn in tax cuts, about USD 2tn in spending cuts and allocates hundreds of billions of dollars more to immigration enforcement and the military. The Senate is now set to discuss the budget resolution.

In the euro area, the ECB's negotiated wages indicator declined to 4.1% y/y in Q4 from 5.4% in Q3. We stress that one should cautiously interpret the indicator as it is rather volatile currently amid the mining of one-off inflation compensation payments. That said, looking across alternative wage indicators, the notion of fading wage pressures is underpinned along inflation easing.

In Hungary, the central bank kept the policy rate unchanged at 6.5% as widely anticipated.

In commodities space, Brent crude oil fell sharply, dropping below USD74/bbl, seemingly due to the souring risk appetite that may partly relate to the yesterday's weaker US consumer confidence figures. Demand concerns related to trade woes and weaker US key figures continue to outweigh potential supply concerns from the recent tightening of sanctions on Iran's oil exports. We anticipate Brent prices to average USD 75/bbl in Q1 and rise to USD 85/bbl in Q4.

Equities: Global equities were lower again, with renewed growth fear amid weaker US macro data. Europe managed to defy the sour sentiment and rose 0.3%, whereas S&P sold off -0.5% and Nasdaq -1.4%. This takes S&P 500 -3% off its peak, Nasdaq -5% and Russell -11% off its 2024 record and -6% since the sell-off early February. Meanwhile, Stoxx 600 is only decimals away from a new record high. So, the weakness has really been ringfenced to the US. Same story this morning, with Asian markets bouncing higher driven by Chinese tech (Hang Seng 3%). On a global scale, the defensive rotation has been substantial, with defensive sectors outperforming cyclicals by 5p.p. the last week. This rotation continued Tuesday with tech and consumer discretionary (Tesla -8%) underperforming while yield sensitive homebuilders, off-priced stores, staples and health care fared better. US futures are higher this morning.

FI: Global yields continued drifting lower through yesterday's session due to a range of factors, including the softening of the US Conference Board Consumer confidence survey in February. 10Y US Treasury yields dropped 10bp to 4.29%, the lowest level of the year, with markets adding to expectations of additional Fed easing this year. The direction of yields was also downward pointing in Europe, but to a much lesser extent. Bunds saw significant underperformance following the speculations that the current Bundestag will rush through a softening of the German debt brake rules before convening on 25 March. The Bund ASW spread dropped to an all-time low of -5.2bp in the early part of the session, but most of the move faded in the afternoon. Longer term inflation swap rates fell for the third session in a row along with energy prices.

FX: JPY rallied, and NOK came under pressure yesterday amid souring risk sentiment and a sell-off in oil. USD/JPY fell below 149 and EUR/USD rose back above 1.05.