Tariffs, NFP and ECB to dominate this week
March is gearing up to a be a seminal month for financial markets. Firstly, the big move late on Sunday was in crypto. President Trump announced an executive order to create a Crypto Strategic Reserve, which will include a variety of crypto coins, including some of the smaller coins like Sol and ADA. Trump said he wanted to make the US the crypto capital of the world, which has sent crypto soaring at the start of this week. Bitcoin rose sharply immediately after this news; Bitcoin/ USD rose to $95,000, although it has since given back some early gains and is consolidating on Monday. Ironically, a currency that was designed to be isolated from government interference and decentralized, is now reliant on the US government for its fortunes.
We expect a broad-based recovery in crypto, with the $100,000 level an obvious target for Bitcoin. There has been a surge in activity in the options market, with a number of bullish bets being placed on further gains for crypto, now that President Trump has shown his loyalty to the currency. It will be interesting to see what happens to the Nasdaq. Bitcoin had traded like a tech stock since it peaked in mid-January. Now that Bitcoin is in recovery mode, can it drag the Nasdaq higher with it? The Magnificent 7 has had a tough time of it this year, and the group of 7 mega cap US tech stocks had fallen to its lowest level since November late last week, although they staged a decent recovery on Friday ahead of the news on the crypto reserve. If tech stocks do follow crypto higher, this could help broader US indices to recover after a bruising start to the year.
Tariff threats get real
Tariffs will be a key theme for March. Mexican and Canadian exports are expected to see tariffs of 25% from Tuesday, there is an increase on tariffs in China and tariffs for the EU are also expected later this month. This comes before reciprocal tariffs arrive a few weeks later. Tariffs are no longer a mere negotiating tactic employed by President Trump, these tariffs are aimed at protecting domestic US industries, reshoring, and raising tax revenue. The shift in the US’s traditional approach to global trade is a major transition for the global economy, it will take time to adapt to this new world order, and the impact is being felt across financial markets. As businesses become more cautious, they may delay investment and expansion decisions that will weigh on global growth, and the future direction of risk assets.
This effect of tariffs may already be weighing on growth. The Atlanta Fed’s GDPNow model for US economic growth is expecting Q1 GDP to swing into negative territory and its latest forecast is for a 1.5% contraction in the US economy this quarter. This is a massive shift, last week it was predicting a 2.3% gain in GDP. Economic data has been weak in the US, especially sentiment data, which will have had a significant impact on these estimates. The worrying aspect is that this does not include the effect of tariffs, which will only come into force this week, and are expected to weigh on GDP down the line. The question now is, will Donad Trump be willing to sacrifice US economic exceptionalism for his new programme of tariffs?
The case for a dollar recovery
Ironically, since Trump became President, US economic data has underperformed, and US stock markets have lagged behind their global peers, especially Europe and Chinese indices. After rallying strongly in the lead up to Trump’s inauguration, the dollar peaked in mid-January, and the dollar index lost more than 3% in February. The dollar index emerged as a victim of the FX market’s ‘tariff fatigue’, however, now that Trump has got serious about tariffs once more, the dollar is on the rise once again. The dollar finished February on a strong note, the US dollar was the strongest G10 currency last week and rose more than 2% vs. the NZD and AUD, more than 1% vs. the CAD, while USD/JPY was higher by 0.6%. The pound was the most resilient G10 currency vs. the USD last week, which is also linked to tariffs, since, for now, the UK is enjoying one of the better diplomatic relationships with the US President and is tariff free.
Also worth noting is bonds, US bonds rose for a third week, and the 10-year Treasury yield fell nearly 20 basis points last week. The 10-year yield is now at its lowest level since mid-December. It is worth noting that although Trump’s Treasury secretary has said that a lower 10-yield is important for the administration, we think that the biggest driver of lower US yields is the weakening in US economic data, and this is why a lower yield has not boosted US equities. We expect this relationship to continue going forward.
Why March will be crucial for financial markets
We are entering a new phase for geopolitical and economic relationships, which will have a profound impact on the global economy in the coming years. There will be some large events in the next month including tariffs and potentially the end of the war between Russia and Ukraine and the fallout that this could trigger. Added to this, there is expected to be a significant slowdown in US immigration this year, which could have an impact on the US labour market. This could determine Fed policy and the trajectory of US economic growth and productivity. The surge in the US population due to immigration post-Covid, is one of the lesser spoken about reasons why the US economy outperformed. With that impulse now fading, the US economy could slow even more in the coming months, which adds another, more dangerous, level of uncertainty for investors.
Thus, March is key test for market resilience. The prevailing market narrative is shifting from US economic exceptionalism to US political disruption. This may be good for the dollar and US bonds, but the uncertainty that this is producing is unlikely to be a friend to the equity market bull. So far in 2025, Europe and China have trumped US equity indices. However, can Europe and China continue to outperform in the wake of tariffs and shifting of geopolitical tectonic plates now that the US is unwilling to be the security backstop for Europe, and especially Ukraine?
Will US stocks outperform Europe once more?
Last week, the Eurostoxx index broke a 4-week running streak, the Cac also closed lower. Is this a sign that enthusiasm for European stocks could fade as we move into March? Futures indicate a positive across European stock indices on Monday, however, investors may start to cherry pick European favourites going forward. The FTSE 100 managed another week of gains, and the Dax index also closed higher last week. This is not an anomaly. The robust performance of the Dax was driven by defense stocks including Rheinmetall and MTU Aero Engines, which rose by 12% and 9% respectively last week. The FTSE 100 was led higher by Rolls Royce, who delivered a strong set of results alongside news about increased defense spending by the UK government, its share price rose by more than a fifth last week, while BAE Systems rose by 12%. This is a strong environment for indices with a defensive focus, and we could see the Dax and the FTSE 100 continue to outperform until we get a clearer understanding of what will happen next between Russia and Ukraine.
Europe steps up, will it help stocks?
On the geopolitical front, Europe has united, along with the UK, to try and forge a peace plan that is acceptable to Ukraine. This will need to ratified by the US before there is any approach to Putin and Russia. It is a first step and suggests that Europe is focused on protecting Ukraine in the future and taking more responsibility for its own security, and the euro is higher on Monday after news of a successful European summit. This development also suggests that defense indices like the FTSE 100 could be in vogue for some time. European leaders will meet again on Thursday and will reach a final agreement in a couple of weeks. What is decided could be make or break for Ukraine, and for European relations with the US.
Although markets are focused on geopolitics and the drama in the oval office last Friday, alongside tariffs, there are sone key economic data releases this week. Below, we look at two key market moving events that should be watched closely.
1, Non-Farm Payrolls
This Friday we will get the latest labour market data from the US. For now, economists expect the US labour market to create 160k jobs last month. This is a slight uptick on January’s figure of 143k, but it suggests a slowdown in labour market momentum since 2024. A strong labour market has been a key support for the US economy and for consumer spending, however, the push by Elon Musk and his colleagues at Doge to reduce the size of the government and to cut government spending risks weakening the labour market. While there have not yet been mass redundancies of Federal workers, there have been some, and there is also a hiring freeze. The government has been a key component of the labour market in recent years. Last month, the government boosted jobs growth by 32,000, we doubt that it will have the same impact in February.
Data from the US has been trending lower in recent months, and the Citi economic surprise index fell to its lowest level since September, as the US economic malaise continues. The deteriorating economic data has hindered US stock markets as growth fears remain elevated. The stirrings of discontent around the US economy in recent weeks risks turning into something more onerous for investors if this week’s US economic data shows further deterioration.
It is worth noting that consumers’ confidence levels in the jobs market over the medium term has also trended lower in recent months. This means that the unemployment rate is also worth watching. Any uptick in the unemployment rate could trigger a broad bout of risk aversion. The market is expecting no change, and the unemployment rate is expected to remain steady at 4%. Interestingly, the drop in immigration could limit any deterioration in wage growth, we may need to see some serious economic deterioration for wage growth to slow significantly. Wage growth is expected to hold steady at 4.1% for last month.
It is also worth watching the US ISM data that will be released this week. It will be a timely indicator to see if tariff threats weighed on new orders and business activity last month. Fed speak will also dominate the schedule this week. Payrolls is the last labour market indicator to be released before the Fed meeting on 18/19th March. Fed speakers have, on balance, been trending in a hawkish direction since October. However, in recent weeks there has been a notable caution in Fed speakers’ comments, as the central bank waits to see the impact of the new Trump administration’s economic policies. We expect this tone of caution to continue, however, any comments about the impact of tariffs on US inflation pressures could have a large market reaction, especially for the dollar and bonds.
2, ECB meeting
The ECB is expected to deliver their 7th rate cut of this monetary policy cycle on Thursday, and their first consecutive rate cut. The market is expecting a 25bp rate cut which would bring the main refinancing rate down to 2.5%. The market is fully expecting a cut this week, there is a 99% chance of a cut priced in by the futures market. There is also a decent chance of another cut at their meeting in April, there is currently at 68% chance of an April cut.
Interestingly, as the market continues to price in rate cuts from the ECB, and the market’s current evaluation of the neutral rate at below 1.8%, Bloomberg’s ECB Speak index suggests that ECB members are starting to sound more hawkish. Although the index remains in negative or ‘dovish’ territory, it is at its highest level for nearly a year.
So, why are ECB members starting to sound a touch less dovish, and will it impact ECB policy? There is a tone of caution across central banks right now, due to the unknown impact of President Trump’s tariff policies. Will they hinder the EU’s economic recovery and spur inflation? Either way, it will take some time to know the effects of US tariffs on EU exports as they have yet to be formally given a start date. Due to this, there is a chance that the market is pricing in too much loosening from the ECB.
Last week’s national inflation data justifies loose monetary policy. Inflation in France fell to a 4-year low, while in Italy prices remain stubbornly low. There was also a slight easing of regional price pressures in Germany. CPI is released for the Eurozone ahead of the ECB meeting. The core rate of inflation for February is expected to fall to 2.5% from 2.7% in January. Thus, there is a case for a rate cut this month, even if the future outlook is less clear.
The ECB will also release its latest economic forecasts alongside this meeting. They could increase the case for remaining on hold next month, as the disinflation process, which is expected to remain on track, could be disrupted by Trump’s tariffs. We expect the ECB economic forecasts to remain stable for the most part, albeit with a massive caveat that tariffs could cause severe disruption to global trade flows and thus economic growth. It’s tough to be a central banker these days.
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