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Finalized Eurozone inflation figures are also out later today. However, barring a marked revision, the numbers are unlikely to impact risk assets.
German Election Results Bring Relief but Concerns Remain
On Sunday, February 23, Germany’s election results delivered no shocks, with conservative Friedrich Merz set to become the new Chancellor. Merz pledged to reduce EU dependence on the US ahead of coalition negotiations.
Markets reacted positively: the EUR/USD rallied 0.55% to 1.05137, and the DAX futures jumped 251 points ahead of Monday’s European opening bell.
Expert Views on the German Election Results: Bad But Could Be Worse!
Despite the positive market reaction, experts expressed concerns. Robin Brooks, Senior Fellow at the Brookings Institute, commented:
” Today’s election is a disaster for Germany. CDU underperforms and goes weakened into coalition negotiations with SPD and Greens, who undermined CDU’s efforts to restrict immigration and take votes away from AfD. Deeply cynical electioneering by SPD and Greens that only helps AfD.”
A Jamaica coalition comprising CDU/SPD/Greens could allow the AfD to continue growing and have a greater presence in the next election.
However, things could have been worse. Brooks acknowledged:
“It could have been worse, you are right. AfD is also – along with CDU – underperforming expectations when you take into account the string of attacks in the run-up to the election. Hopefully a sign that most Germans are still moderate and not panicking…”
US Services Sector Contracts as Inflation Returns
Meanwhile, in the US, weaker-than-expected services data weighed on risk assets.
The S&P Global Services PMI slid unexpectedly from 52.9 in January to 49.7 in February, signaling a sector contraction. Accounting for around 80% of the US economy, February’s numbers could support a more dovish Fed rate path.
However, the Michigan Inflation Expectations Index jumped from 3.3% in January to 4.3% in February, potentially delaying Fed rate cuts.
The Kobeissi Letter commented on US inflation, stating:
“US CPI inflation is on track to hit 4.6% over the next 6 months, according to Bank of America. CPI inflation has averaged +0.4% on a month-over-month basis over the last 3 months. If this trend continues, this puts year-over-year inflation on pace to hit 4.6% by July, the highest since April 2023.”
These projections underscored the increasing uncertainty about the Fed rate path amid ongoing concerns about tariffs.
US Markets Tumble on Economic Data
US equity markets tumbled on Friday, February 21, as investors digested the service sector and inflation numbers. The Nasdaq Composite Index dropped by 2.20%, while the Dow and the S&P 500 saw losses of 1.69% and 1.71%, respectively.
Key Focus: Dallas and Chicago Fed Reports
On February 24, the Chicago Fed National Activity and Dallas Fed Manufacturing Indexes will draw interest.
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