The European Central Bank is widely expected to cut interest rates at its policy meeting next week, so investors will be focused on trying to find clues about its likely moves later this year.
A quarter-point cut on March 6, which is fully priced in by the swaps market, would bring down the deposit facility rate to 2.5 per cent, the lowest level since February 2023 and 1.5 percentage points below its peak.
Executive board member Isabel Schnabel told the Financial Times in February that the central bank should “now” start to debate a “pause or halt” to rate cuts, adding that rates have come down so far that “we can no longer say with confidence that our monetary policy is still restrictive.”
If the ECB watered down or removed its previous statement that “monetary policy remains restrictive”, this could be seen as a hint that rate cuts may be paused in April or June, say analysts, a scenario that financial markets have partly priced in.
“A pause in April is possible if disinflation stalls or the activity data surprises notably to the upside,” Goldman Sachs economists wrote in a note to clients on Friday.
Preliminary inflation data for February, to be released on March 3 by Eurostat, will be a key data point for the ECB. Economists polled by Reuters on average expect an annual rate of 2.3 per cent. While this would be the fourth monthly miss of the ECB’s medium-term 2 per cent target in a row, it would still be a marked fall from January’s 2.5 per cent.
The ECB is forecasting that price pressures will come down further over the coming months. “Core inflation has slowed broadly in line with ECB staff projections, with significant progress on wage growth normalisation,” Goldman Sachs economists said. Olaf Storbeck
How strong is the US jobs market?
Investors will look at US jobs data for February, due on Friday, to provide clearer indications on the health of the world’s largest economy after a spate of mixed data muddied the outlook.
Data from the Bureau of Labor Statistics is expected to show that US employers added 133,000 new roles last month, according to a Reuters poll of economists, down slightly from 143,000 in January.
The previous reading was considerably lower than forecasts, but a drop in the unemployment rate and strong revisions to older numbers have pointed to a resilient American jobs market.
Investors are relying on the jobs data to provide clues about the timing of interest rate cuts this year.
Stronger-than-forecast jobs numbers could push back those expectations, while any signs of deterioration may lead traders to pull forward their bets on monetary policy easing. Current market pricing puts the first Fed cut of the year by July.
Investors’ bets on the timing of rate cuts in 2025 have wavered in recent weeks as they wait to see if US President Donald Trump makes good on his threat to impose tariffs on some of the US’s largest trading partners.
Some economists fear that an escalating trade war could slow global growth. But a pair of closely watched surveys subsequently showed that US consumers are also growing increasingly nervous about tariffs, while an S&P Global gauge showed a contraction in services activity in February for the first time in more than two years.
Moreover, the US inflation growth rate came in at 3 per cent in January, above the Federal Reserve’s target of 2 per cent and overshooting economists’ expectations.
“The broader outlook for the real economy has become increasingly uncertain, even as the Fed’s efforts to reestablish price stability are ongoing, at best,” said Ian Lyngen at BMO Capital Markets. “The verdict remains out as to whether [Fed policymakers] can claim victory on the inflation front,” he added. Harriet Clarfelt
Has Chinese business activity picked up?
China’s Caixin services purchasing managers’ index on Wednesday will offer the first insight since the lunar new year holiday into business activity in the world’s second-largest economy.
The monthly reading has shown a modest expansion in the five months since Beijing aggressively cut lending rates in a bid to stimulate economic growth.
That indicates that easing financial conditions are beginning to translate into the real economy, as the Caixin indices track activity in the country’s privately run businesses. Services PMIs tend to reflect domestic demand, while manufacturing PMIs are a better gauge of business sentiment for the country’s export-oriented factories.
Investors may also look for any indication that technology is stimulating business activity, after Chinese start up DeepSeek in January released its cutting edge artificial intelligence model and roiled the share prices of US technology companies. However analysts cautioned against an immediate effect.
“DeepSeek is a great three to five year trend,” said Winnie Wu, chief China equity strategist at Bank of America. But the technology will not fix China’s problems in weak consumption, deflation, youth unemployment and geopolitical uncertainty, Wu added.
Economists said the shadow of a potential trade war with the US hung over the Chinese economy. US President Donald Trump announced this week that his administration would impose tariffs of 10 per cent on imports from China from March fourth.
“There’s the AI enthusiasm, but there’s clearly a lot of geopolitical risk,” said Julian Evans-Pritchard, head of China economics at Capital Economics. “As those risks crystallise, the impact on Chinese markets is not going to be positive.” William Sandlund
