Week Ahead: Competing catalysts can continue volatility

Markets will remain focused on the possible changing Ukraine dynamic that is potentially shifting the transatlantic relationship built up over decades. Is the US looking to be more isolationist or is it simply very strong rhetoric to ruffle (EU) feathers? The answer to that question will unfold over the next few months and may be longer, but the rollercoaster ride of ceasefire negotiations will grip price action. Of course, so too will any more tariff announcements, though markets have started to look through these now, with the focus on Trump’s actions rather than words.

The German election should see the centre-right CDU gain power if the polls are correct, but we are unlikely to know the composition and policy priorities for a few weeks.  Europe more generally is struggling under the weight of a potential ramp up in eurozone defence spending, following on from last week’s geopolitical storm unleashed by various members of the new US administration. We will be watching European debt to see if this new theme plays out, with a steepening in the bond curves warning of increased government bond issuance and potential pressure on the euro.

This week’s main US data comes on Friday with the core PCE deflator. Although core CPI and PPI came in hot, economists say the parts that feed into this report look less warm. This shouldn’t unduly alter the picture for the Fed, which is seen sitting on its hands until after summer for the next rate cut. Personal income and spending may also be of interest, due to the surprisingly weak retail rales figures. In the short-term, the USD is trading on the April 2024 swing highs for support, with the 100-day SMA just below.

Nvidia’s results will grab the attention, after stocks endured a rough Friday with the benchmark S&P 500 suffering its worst slide since mid-December. While the “Trump trade” is being modestly questioned, focus will be on the AI darling’s guidance for chip supply and demand to justify its ongoing rich valuation. That is currently around 32 times forward 12-month earnings estimates, down from 40 in early November and versus the S&P 500’s 22 times. Nvidia is the world’s second biggest company by market cap with just above a 6% weighting in the S&P 500.

JPY is the top performing major this month and year-to-date. Talk of more BoJ rate hikes has increased recently, with roughly 21bps currently priced into the July meeting. This week’s Tokyo inflation data will be watched by policymakers for signs as to whether recent food spikes are being passed onto consumers. A strong report could trigger more selling in USD/JPY, with the major sat on the midpoint of the September to January rally at 149.22.

In Brief: major data releases of the week

Wednesday, 26 February 2025

– Australia CPI: Consensus sees monthly inflation at 2.5% in January, modestly higher than the quarterly 2.4%. The first month of the year is typically soft. The RBA recently said that upside risks to inflation remain, so the board remains cautious on more rate cuts.

– Nvidia Earnings: The giant chipmaker is expected to post Q4 profit of $20.89bn, driven by a roughly 72% increase in revenues from a year earlier. Investors are seeking confirmation that the AI driven trend is intact after the emergence of DeepSeek’s model. Options imply a 7.7% swing for the shares in either direction after the results.

Thursday, 27 February 2025

– ECB Minutes: The central bank cut by 25bps at this meeting, taking the depo rate to 2.75%. The Governing Council still saw policy as “restrictive”. Rate setters also said disinflation was on track even though inflation was high. Focus will be on any hints around the terminal rate. 

Friday, 28 February 2025

– Tokyo CPI: Prices are expected to stabilise at 3.3% in February. Food prices are likely to rise further, but these will be offset by falling energy prices due to subsidies. This data is seen as a forerunner to nationwide figures.

– US Core PCE: The Fed’s favoured inflation gauge is seen rising one-tenth to 0.3% m/m and two-tenths to 2.8% y/y. Headline PCE is forecast at 0.3% m/m and 2.5% y/y. The Fed is waiting for further evidence that inflation is coming down before any policy action.

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