Weekly house view | Merz’s “whatever it takes” moment
The week in review
German Chancellor-in-waiting Friedrich Merz and his probable coalition partners agreed a jumbo fiscal package for Europe’s largest economy last week. The landmark plan includes a new special fund for infrastructure investment worth EUR 500 bn (nearly 12% of GDP) over the next 10 years, as well as an exemption for defence spending exceeding 1.0% of GDP from Germany’s debt brake. Merz vowed, “the rule for our defence now has to be 'whatever it takes'." The move saw Bund yields close at 2.8%, the highest in 14 years. The ECB cut its policy rates by 25 basis points but adopted a slightly more hawkish tone. European equities dipped 0.6%. German stock indices surged, with the DAX[i] up 2% (in euros). In the US, Q1 growth is slowing, with increased downside risks. Disappointing jobs numbers came as growing uncertainty about trade policy negatively impacts investment and hiring decisions. The S&p500[ii] fell 3.1% (in USD). US 10-year yields halted their fall on higher inflation fears and closed at 4.3%. In China, the government set its 2025 GDP growth target at “around 5%” and set out stimulus plans. Chinese 10-year yields rose to 1.85%, their highest since December 2024. Oil prices fell as OPEC+ decided to proceed with an April oil output increase. Crude oil WTI fell 4.2% on the week.
Geopolitics
Iran’s supreme leader said Tehran will not be bullied into negotiations after US President Trump urged the country to negotiate a nuclear deal.
Key data
The US created 151,000 jobs in February, falling short of expectations for 160,000. The unemployment rate was 4.1% versus expectations of 4.0%. The ISM manufacturing purchasing managers’ index (PMI) dropped to 50.3 in February from 50.9 the previous month. China’s CPI fell 0.7% in February year-on-year. South Korea’s PMI for manufacturers fell to 49.9 in February, from 50.3 in January.
[ii] Source: Pictet Wealth Management, Thomson Reuters. Past performance, S&P 500 Composite (net 12-month return in USD): 2020, 18.4%; 2021, 28.7%; 2022, -18.1%; 2023, 26.3%; 2024, 25%.