The European Central Bank (ECB) met this week for the second time this year, and oversaw a 25bps (0.25%) rate cut, bringing interest rates down to 2.65%. This marks the sixth consecutive rate cut since June 2024. However, commentary from Governor Christine Lagarde suggests the end of the rate-cutting cycle is near.
Before we discuss the ECB meeting, Eurozone inflation data for February was released at the start of the week. Inflation pleasantly fell from the previous month’s figure of 2.5% to 2.4% although it didn’t quite meet market expectations of 2.3%. Services inflation, the largest component of the of the Consumer Price Index (CPI), fell from 3.9% in January to 3.7% in February, the lowest level since April 2024, which pleased the ECB.
The ECB concluded their monetary policy meeting in Frankfurt on Thursday and agreed on a further 25bps (0.25%) rate cut, bringing interest rates down to 2.65%. The ECB noted that the decision to reduce rates was based on their updated assessment on the inflation outlook, the dynamics of underlying inflation and the current strength of the monetary policy transmission. Markets observed changes in commentary as Christine Lagarde mentioned “monetary policy is becoming less restrictive” and did not pre-commit to a particular rate cut. This could be viewed as a hawkish shift in policymaker views, as global trade tensions intensify, which has the potential to reaccelerate inflation and weaken economic growth. The Euro is up over 4% vs the dollar for the week and Euro and German bond yields rose on the news.
European markets also had to digest the news that Germany plans to significantly increase spending (and therefore bond issuance) with the announcement of a proposed €500billion special fund to invest in infrastructure and further defence investment, which would be negated from debt rules. While it is pleasing to see Germany launch ambitious plans to help kickstart growth, there are concerns such levels of spending could ignite inflation. European government bond yields all sold off aggressively on the proposal, with German 10 tear yields rising 0.3% in a single day. The news did support equity markets, with defence stocks the main winners. Only a few years ago, many investors saw defence as an uninvestable sector, since then, its performance has been stellar.
The US Manufacturing Purchasing Managers Index (PMI) simply put is a monthly indicator of economic activity within the manufacturing sector. In February, the manufacturing PMI fell to 50.3 from 50.9 in January. January’s figure was the first expansion (a figure above 50) seen in the sector since October 2022, likely reflecting domestic factories front-loading imports to get ahead of tariffs issues. US domestic manufacturers rely heavily on imported raw materials, and there was a slight win for automakers after President Donald Trump agreed to postpone auto tariffs on Canada and Mexico following a phone call with the CEO’s of General Motors and Ford. Markets have swung wildly this week on the tariff news. After a month’s stay of execution, the US slapped tariffs on a range of imports from Mexico, Canada and China, with retaliatory tariffs being placed on US exports by Canada and China.
We’ve entered into March, and on the first Friday, US Non-farm payroll data is released. For the month of February 151,000 jobs were created, rising from the 125,000 created in January. The US labour market has been resilient despite elevated interest rates however, as tariffs have now been implemented, we can expect to see the knock-on effect on hiring and wages. The unemployment rate rose slightly to 4.1%.
The number of US citizens filling for unemployment benefits fell by 21,000 to 221,000. Markets had forecasted a rise to 235,000, and the drop came as a surprise given the turbulence caused by trade tensions and the deep government spending cuts spearheaded by Elon Musk. The upcoming data should soon reflect these changes, as US employers announced layoff levels of 172,017 in February, with approximately 64,000 coming from government agencies as the Department of Government Efficiency (DOGE) continue to axe government spending, implementing funding freezes and cutting contractors.
UK-listed Kenmare Resources, one of the world’s largest producers of titanium materials operating the Moma Mine in Mozambique, was subject to a takeover offer by its ex-founder Michael Carvill. The bid approach was 530p a share, a 93% premium to the 275p price it closed at on Wednesday night. Shareholders had called for the consideration of a sale back in February 2024. However, the offer was rejected as the business felt the bid undervalued the company. This is another deal which highlights some of the value available within UK markets – the potential acquirer was willing to pay over 90% more than the listed share price, and seemingly must believe even at a 90% premium there is continued value going forward.
Uncertainty levels around the globe have increased and this has been reflected in higher volatility and some drawdowns in risk assets. The US equity market, unlike recent years, has been the worst performing market with the magnificent seven stocks suffering from large falls over recent weeks. Domestic UK has also been challenged as concerns around stagflation and the imminent National Insurance increases have weighed on investor sentiment. Volatility can be uncomfortable; however, investors must be wary of knee-jerk reactions and one way to help avoid behavioural pitfalls is through a robust decision-making structure and genuine portfolio diversification. While the US equity market is down for the year, European equities are enjoying somewhat of a renaissance. Likewise, assets like gold have continued to deliver strong returns during this period of elevated investor concerns.
Nathan Amaning, Investment Analyst
Risk warning: With investing, your capital is at risk. The value of investments and the income from them can go down as well as up and you may not recover the amount of your initial investment. Certain investments carry a higher degree of risk than others and are, therefore, unsuitable for some investors.t