TARIFFS: China Tariff Response A Reminder Of Trade Elasticity Considerations

The ECB’s forward-looking wage tracker is due at 1100GMT. The tracker is seen by the Governing Council ahead of each ECB meeting, but is only released publicly the Wednesday after the decision. The focus should be on negotiated wage growth excluding one-off payments, with the other series including lump sums exhibiting more volatility (see charts).

• In the January update, Q4 2025 negotiated wage growth excluding one-off payments tracked at 2.97%, a touch above the 2.92% tracking from the December 2024 vintage.
• Changes in negotiated wage growth should be expected to filter into overall compensation per employee growth. The ECB projected Q4 2025 compensation per employee growth at 2.8% Y/Y in the March macroeconomic projections.
• At the March press conference, President Lagarde noted that “recent wage negotiations point to a continued moderation in labour cost pressures”.
• As such, we expect the tracker to be broadly consistent with the ECB’s latest compensation per employee forecast.
• Note: The horizon of the tracker may stretch to Q1 2026 in the March update, but this has not been confirmed by the ECB.
• The data can be found here. In January, there was no accompanying press release to the raw data.

ECB President Lagarde's speech at the Economy Watcher's conference doesn't contain too much new or market moving. Two highlights:

• "A general conclusion emerges: when the size and distribution of shocks becomes highly uncertain, we cannot provide certainty by committing to a particular rate path. Otherwise, forward guidance may constrain policy agility in the face of abrupt changes to the inflation environment."
• "Trade fragmentation and higher defence spending in a capacity-constrained sector could in principle push up inflation. Yet US tariffs could also lower demand for EU exports and redirect excess capacity from China into Europe, which could push inflation down".
• "My main message is that in an environment of uncertainty, a strong commitment to maintaining price stability over the medium term is more important than ever"..."As a result, we will need to continue steering the public’s expectations. People will be looking to us – and other policymakers – to understand how we will navigate this more volatile era and help reduce, rather than amplify, uncertainty".

This morning, Germany will hold its fourth 10-year Bund auction of the year. On offer will be E4.5bln of the 2.50% Feb-35 Bund.

• The size is in line with the last re-open of the 2.50% Feb-35 Bund on January 29.
• Recent auctions in the German 10y segment have passed smoothly, with solid bid-to-covers (in a 1.83x to 2.84x range since July), bid-to-offers (1.52x to 2.17x range since July) and the low prices above the secondary market mid-prices throughout 2024/5.
• For the last 2.50% Feb-35 Bund auction on 19 February, the bid-to-cover stood at 2.76x, while the bid-to-offer came in at 2.13x.
• Note that yesterday's Schatz auction was a little softer than usual with the stop price coming under the pre-market mid-price. We still expect today's auction to pass smoothly, but it may also show up some marginal stresses in the market.
• The fiscal situation in Germany is characterized by some uncertainty at the moment as an announcement on additional military and infrastructure spending last week saw German yields jump across the curve - however, for the announced deal to pass, approval from party "the Greens" is likely needed, who yesterday have mentioned they are ready to negotiate after rejecting the initial CDU/CSU/SPD draft proposal earlier.
• Bund positioning currently is short - see our latest Europe PI below.
• The next German auction will be E1.5bln of the 1.80% Aug-53 Bund (ISIN: DE0001102614) on March 19, while the 2.50% Feb-35 Bund will be reopened next on April 2, for another E4.5bln.
• Timing: Results will be available shortly after the bidding window closes at 10:30GMT / 11:30CET.