Contents
Market Overview
Macro Update
Last week’s whiff of inflation evolved into broader concerns about the U.S. economic outlook, just as Europe was being shaken out of a multi-year slumber. Three areas attracted the most market attention this week: oscillating trade tariffs, growing risks to U.S. growth and price stability, and moves to loosen long-standing German and European fiscal policy constraints.
On trade, U.S. President Donald Trump imposed tariffs of 25% on U.S. imports from Mexico and Canada and an additional 10% tariff on U.S. imports from China early in the week, bringing the average U.S. tariff rate on imports from China to just over 30%. Canada and China announced targeted retaliatory tariffs. Within 24 hours, the U.S issued a 30-day exemption for Mexico and Canada auto imports. Following a Thursday call with Mexican President Claudia Sheinbaum, President Trump paused tariffs for all USMCA products from Mexico for 30 days, later extending the reprieve to Canada. On Friday, however, there were new threats of tariffs for Canada.
The tit-for-tat on tariffs led to a volatile week. Equity markets were whipsawed +/-1% with each headline, and three major U.S. stock indices are now in negative territory for 2025 (S&P: -2.6%, Dow Jones Industrial Average: -0.2%, and Nasdaq: -7.1%).
On the shifting balance of risks for the U.S. economy, markets continued to grapple with the potential effects of U.S. government policies on growth and inflation, especially following the ISM Manufacturing survey data. The overall index declined to 50.3, marginally above contraction territory, declining from 50.9 in January and underperforming market consensus of 50.7. While this move was contained, the price measure surged by 7.5 points to 62.4, raising questions about the potential for these increased production costs to be passed through to consumers in the form of higher prices.
In contrast to the manufacturing data, U.S. ISM services rose to 53.5 in February from 52.8 in January, beating the consensus forecast of 52.5. On the inflation front, prices paid rose by 2.2 percentage points to 62.6, a level not seen since early 2023 and the third month in a row of a 60-plus reading.
The U.S. jobs report for February was largely in line with expectations, but focus has quickly shifted to next month’s jobs report, especially given the DOGE effects on Federal payments and employment. Meanwhile, hinting at how the Administration may be viewing this phase of volatility, U.S. Treasury Secretary Scott Bessent on Friday spoke of a ‘detox’ period for the U.S. economy.
These developments contributed to a steepening of the U.S. Treasury curve, with the 2s10s widening by 10bps over the week. The 10-year U.S. Treasury note was closing the week relatively unchanged at 4.2%. Oil prices were also impacted, with Brent joining WTI trading below $70 per barrel, the lowest level since September 2024. The U.S. dollar weakened with the DXY depreciating from 107 at the end of February to 104.
In Germany, the authorities signalled their intention to significantly loosen fiscal constraints. Germany’s chancellor-in-waiting, Friedrich Merz, announced an agreement with coalition partners on March 5th to relax constitutional government borrowing limits and allow for greater military and infrastructure spending. Germany also called on the European Union to reform its own fiscal rules for the same purpose, with the ultimate goal of having the continent take security into its own hands following the retreat of the U.S.
Market reaction to the news was swift, with a surge in German government bond yields in a manner not seen since reunification (10-year widened by 40bps this week to reach 2.8%). Consistent with this, the Euro appreciated to 1.08 from ~1.04 last week, one of the strongest weeks in almost 20 years. Spillover from the sharp Bunds sell off was felt across global markets, with Japanese yields jumping to levels last seen before the Global Financial Crisis.
In China, the Government Economic Work Report published this week unveiled the government’s 2025 growth target of “around 5%”. The official fiscal deficit target was increased from 3% of GDP to 4% of GDP and the authorities pledged moderately loose monetary policy.
In terms of global central bank moves, the ECB lowered its policy rate by 25bps to 2.5%, the sixth rate cut since June 2024, flagging cooling inflationary pressures and a highly fluid global backdrop. In EM, the Turkish Central Bank delivered a third consecutive 250bps cut to its benchmark rate, which now stands at 42.5%. Meanwhile, year-over-year headline inflation dropped to below 40% for the first time since mid-2023, coming in at 39.05% for February and beating market expectations of 39.9%.
EM Credit Update
Аmid a weaker USD and relatively stable U.S. Treasury rates, local debt was the emerging markets outperformer this week, adding 1.7%. Sovereign credit cash bonds were 0.6% lower at the index level, with spreads 3bps wider. Corporate credit bonds were flat, shedding 0.1% with spreads 2bps tighter. On a return basis, investment grade and high yield performance was largely similar; however, high yield underperformed slightly on a spread basis.
The distressed Lebanese USD bond complex remained well supported as bondholders interviewed financial advisors ahead of potential restructuring talks with the new government. Bolivia’s dollar bonds, another distressed story, jumped to the highest level since 2023 on hopes that upcoming elections could bring a credit-positive political change. Ecuador underperformed as markets continue to evaluate risks to economic policy under a potential Luisa Gonzalez presidency. Ghana bonds lagged on President John Mahama’s comments on the country’s fiscal challenges and need for greater consolidation, as well as lower oil prices that pressured SSA oil producers.
On the new issue front, the only sovereign this week was Armenia with a $750m 10Y bond that priced at 7.1%. In the corporate world, activity remained strong with 20 deals coming to the market across EM regions.
The Week Ahead
Next week, the annual session of China’s National People’s Congress (NPC) continues and could provide more clues on economic priorities and plans for the year. Inflation data for the Chinese economy for February is expected to show CPI back into negative territory due to the Lunar New Year effect. Elsewhere, notable global macro data releases include U.S. CPI and PPI for February and the University of Michigan preliminary survey results for March. February inflation data will also be published across the Eurozone and emerging markets. Central bank rate decisions are due in Canada, Poland, and Peru.
Fixed Income
Equities
Commodities
Source for data tables: Bloomberg, JPMorgan, Gramercy. EM Fixed Income is represented by the following JPMorgan Indicies: EMBI Global, GBI-EM Global Diversified, CEMBI Broad Diversified and CEMBI Broad High Yield. DM Fixed Income is represented by the JPMorgan JULI Total Return Index and Domestic High Yield Index. Fixed Income, Equity and Commodity data is as of March 7, 2025 (mid-day).
Country Highlights
Uncertainty on Ukraine Continues to Dominate Global News Flow
Event: EU leaders gathered in Brussels this week to reinvigorate their support for President Volodymyr Zelenskiy. They discussed ways to loosen fiscal constraints to ramp up Europe’s defence spending and provide as much support to Ukraine as possible in the meantime.
Gramercy Comment: The talks come amid a pause in U.S. military aid and intelligence sharing with Ukraine announced by the White House earlier in the week that could prove detrimental to Kyiv’s battlefield operations. European leaders are also trying to put back the pieces of the broken U.S.-Ukraine diplomatic relationship following the Oval Office debacle last Friday. Meanwhile, President Macron suggested that France could be open to sharing its nuclear deterrent to protect European allies, a proposal Moscow quickly labelled as “extremely confrontational”.
Officials on both sides of the Atlantic signalled that the so called “minerals deal” was still on the table, but President Trump wanted to link it with Ukraine committing to a “quick ceasefire” with Russia. The idea of quick ceasefire under current conditions is highly problematic for Europe, given the lack of medium-term security guarantees for Ukraine and concerns about broader European security.
In that context, Ukraine’s former top military commander and current ambassador to the UK, Valerii Zaluzhnyi, sharply criticized the White House for “destroying the world’s order” and “the unity of the Western world”, which could complicate President Zelenskiy’s efforts to salvage the relationship with President Trump and potentially return to the White House, alongside President Macron and British PM Keir Starmer, to present a united European proposal for ending the conflict.
China’s Annual NPC (National People’s Congress) Session Delivers No Surprises
Event: The Government Economic Work Report, published on March 5th, unveiled the government’s 2025 growth target of “around 5%”. The official fiscal deficit was increased from 3% of GDP to 4% of GDP while the special central and local government bond issuance quotas were set at 1.3trillion RMB and 4.4 trillion RMB, respectively. The local government bond swap quota was set at 2 trillion RMB. Authorities pledged moderately loose monetary policy. On the consumption side, there was expansion in the special government bond issuance for the trade-in subsidy, as well as a small increase in pension and healthcare spending. On property, the messaging was consistent with the commitment in December to prevent further decline and stabilization in the sector, with main policies directed towards urban village renovation and expanded local government purchases of inventory.
Gramercy Comment: The policy agenda was in line with our expectations. Recent activity data have shown incremental momentum with February NBS and Caixin PMI indices inching upward to 51.1 and 51.5, respectively. Property prices continued to contract in annualized terms but at a slower rate, after appearing to have bottomed out in mid-4Q. Housing sales of the top 100 developers moved into slightly positive territory. U.S.-China trade tensions escalated with imposition of an additional 20% tariff on all U.S. imports from China, which brings the average tariff rate to just above 30%. Trade data for February showed some signs of tariff related export weakness with export growth easing to 2.3% year-over-year from 5.6% year-over-year the prior month. Imports contracted by 8.4% year-over-year amid still weak domestic demand conditions.
In this context, the government’s annual growth target of “around 5%” set at the annual NPC session at the start of this month will be difficult to achieve solely with the support outlined in the Government Economic Work Report. Going forward, we expect China to continue to augment policy as necessary to approach its growth target amid pressure from global trade policy or weak domestic demand.
Turkish Central Bank Cuts Another 250bps
Event: This week the Central Bank of Türkiye (CBT) delivered a third consecutive 250bps cut to its benchmark rate that now stands at 42.5%, in line with market consensus. Meanwhile, year-over-year headline inflation dropped to below 40% for the first time since mid-2023, coming in at 39.05% for February and beating market expectations of 39.9%. In monthly terms, the February CPI data were also constructive at 2.27% vs the expected 2.90%. They were 5.03% and 3.2% in January 2025 and February 2024, respectively.
Gramercy Comment: The February CPI data signal that disinflationary trends in the Turkish economy appear to be solidifying, supporting our expectation that the CBT will be in a position to continue to deliver a measured monetary policy easing. Our working assumption for 2025 year-end inflation is in a 25-30% year-over-year range, provided that the current trajectory holds. This anchors our expectations of around 1000bps of rate cuts in the pipeline for the rest of the year.
However, we expect the CBT to remain vigilant on any signs that inflationary pressures could be intensifying beyond the current outlook and adjust its monetary policy path accordingly. We will also be looking for fiscal policy tightening measures by Minister Mehmet Simsek’s team as the year progresses, which will help the CBT to re-anchor medium-term inflation expectations. In this context, we remain constructive on local currency sovereign debt and expect the current policy preference, which consists of only a modest gradual nominal TRY depreciation below the level of monthly inflation (i.e. real appreciation), to continue.
Tariff Uncertainty Persists
Event: On March 4th, President Trump imposed tariffs of 25% on U.S. imports from Mexico and Canada and an additional 10% tariff on U.S. imports from China, which bring the average U.S. tariff rate on imports from China to just over 30%. Canada and China announced targeted retaliatory tariffs. Within 24 hours, the U.S. issued a 30-day exemption for Mexico and Canada auto imports followed by a call between Presidents Sheinbaum and Trump on March 6th, which led to a 30-day exemption for all USMCA products from Mexico. Shortly after, the U.S. announced that Canadian products under USMCA would also receive a 30-day reprieve. On Friday, however, there were new threats of tariffs for Canada.
The reaction in the FX markets was volatile and mixed as a confluence of factors, including speculation over longevity of tariffs, risks of slowing growth, lower oil prices and higher fiscal spending in Europe, were at play. This ultimately drove DXY weaker and CNY stronger. MXN and CAD were roughly flat despite intra-week volatility.
Gramercy Comment: We expect tariff uncertainty to persist into 2Q and continue to drive market volatility. In Mexico, President Sheinbaum’s cool-headed approach has paused any immediate retaliation, and Mexico’s politically sensitive economic links with the U.S. leave the country well-positioned for a short-term reprieve.
We think an eventual off-ramp for Mexico should be easier than for China, but not until USMCA negotiations are underway. In the meantime, the uncertainty poses near-term downside risks to Mexican growth. For now, Banxico has space to continue easing monetary policy to partially offset weakness, while China will likely have to step-up support later in the year to achieve its near 5% growth target.
Ports Deal Constructive for Panama, Headwinds on Canal Likely to Persist
Event: U.S. asset management giant BlackRock said this week it will lead a consortium to buy a controlling stake in CK Hutchison, the Hong Kong based firm operating ports across 23 countries, including two ports near the Panama Canal. The CK Hutchinson ports have attracted President Trump’s attention as potential conduits of Chinese influence over the canal, and Panama’s government has been under significant pressure by Washington to find a solution.
Gramercy Comment: This announcement is credit-positive for Panama from two perspectives: It hands President Trump a victory on an issue that he has devoted significant attention to, and the transfer of ownership will take place through a market transaction, avoiding any controversy around property rights and the rule of law.
In 2023 Panama revoked Canadian mining company First Quantum’s contract to operate a large copper mine in the country, which became controversial and led to some dampening of investor sentiment. It is therefore positive that the ports transaction is structured in way that it can avoid a similar outcome.
Despite the ports win, President Trump’s comments suggest he is still very much looking forward to “taking back” the Panama Canal. This is likely to keep geopolitical uncertainty around Panama elevated. Any actions in that direction would be in violation of the Panama Canal Treaty of 1977 signed by U.S. President Jimmy Carter and would be extremely controversial and disruptive for global trade. This is a major headache for Panama’s president, Jose Raul Mulino, who responded to President Trump’s claims that Panama has broken the agreement by posting “Once again, President Trump lies” on X. President Mulino is in a delicate situation where a failure to respond to verbal attacks by the White House could cost him valuable domestic political capital amid his administration’s efforts to pass a very challenging social security reform and avoid losing Panama’s coveted IG credit rating by Moody’s and S&P.
Emerging Markets Technicals
Emerging Markets Flows
Source for graphs: Bloomberg, JPMorgan, Gramercy. As of March 7, 2025.
For questions, please contact:
Kathryn Exum, CFA ESG, Director, Co-Head of Sovereign Research, [email protected]
Petar Atanasov, Director, Co-Head of Sovereign Research, [email protected]
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