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European Bond Investors Worry About German Defense and Infrastructure Stimulus Size

Bridgette Randall
19 Mar, 2025
London

European markets rested after advancing in the previous session following a historic constitutional amendment in Germany and Ukraine ceasefire talks.

Benchmark indexes in Frankfurt, Paris and Milan traded around the flatline as investors reviewed the details of the debt brake revision in Germany.

Late Tuesday, Germany's Bundestag approved a measure to exclude defense spending from the structural deficit calculation, allowing the new coalition government to ramp up arms spending without any upper limit.

German coalition government is likely to increase defense spending from the current 0.35% to as high as 3.5% of GDP, starting from the current fiscal year.

The presumed German Chancellor, Friedrich Merz, announced a €500 billion fund to invest in replacing Germany's ageing infrastructure fund, after an agreement with the Green Pary to dedicated about €100 billion in climate control related investments.

The debt brake revision provides a much needed shot to revive economic growth, support the European Union's efforts in Ukraine, and improve Europe's military security.

The Bundesrat, the upper house of the parliament, is scheduled to approve the landmark bill on Friday.

Ukraine and Russian ramped up militarty atacks after Russia agreed to a temporary halt on attacks on energy and other vital infrastrucure in Ukraine, after leaders of Russia and the U.S. held formal talks on Tuesday.

On the economic front, the Euro Area wage growth in the fourth quarter of 2024 slowed to an annual 4.1% from the downwardly revised 4.3% in the third quarter, Eurostat reported on Wednesday.

Wage growth in France eased to 1.7% from 2.7%, in Spain to 3.2% from 4.9%, and in Belgium to 2.2% from 2.6%, but accelerated in the Netherlands to 6.2% from 5.9%, in Germany o 4.4% from 4.0%, and Ireland to 5.4% from 5.2% in the third quarter, respectively.

However, wage growth in Italy was steady at 4.3%.

Europe Movers

Eseentra plc dropped 5.5% to 109.33 pence, and the essential product maker reported a decline in organic sales growth in 2024.

Vonovia SE dropped 1.7% to €25.08, and the German real estate developer reported a narrower loss in the fiscal 2024.

Rio Tinto plc decreased 0.1% to 4,903.0 pence, and the company's management urged shareholders to vote against the proposal by a hedge fund to review company's dual listing in London and Sydney.

Traton SE dropped 5.5% to €33.70 after the parent company Volkswagen AG said it sold 2.2% stake in the commercial vehicle maker for €360 million.

Bank of Japan Holds Rates Steady, Japan's Trade Balance Swings to Surplus

Akira Ito
19 Mar, 2025
Tokyo

Japan's stock market indexes traded in a tight range as investors reviewed monetary policy decisions and an international trade balance update.

The Nikkei 225 stock average closed down 0.3%, and the broader TOPIX added 0.5% after two benchmark indexes diverged.

BoJ Holds Rates Steady, Citing Global Trade Uncertainties

The Bank of Japan held its short-term interest rate around 0.5%, as widely anticipated, and the central bank halted its rate hike after lifting rates in three previous meetings.

The monetary policy committee took a cautious view of Japan's export-driven economy amid rising trade tensions with the U.S. and slowing economic growth in China.

The committee noted that private consumption continued to advance, driven by an increase in wages despite rising cost pressures, but exports and industrial output lacked momentum and were nearly unchanged.

The annual rate of inflation ranged between 3% and 3.5%, largely because of a jump in prices for services, and underlying retail inflation is expected to grow at a moderate pace in the months ahead.

The yield on 10-year Japanese government bonds was nearly unchanged at 1.5% after the Bank of Japan's widely anticipated rate decisions.

Japan's Trade Balance Swings to Surplus in February

On the economic front, Japan's trade balance swung to a surplus after exports advanced in February. Exports may have been benefitted because of front loading by customers ahead of higher tariffs in the U.S.

Japan’s trade balance swung to a surplus of 584.5 billion yen in February from a deficit of 415.43 billion in the same month a year earlier.

The rebound in exports by 11.4% to 9.2 trillion yen, the fastest increase since May 2024, drove the reversal in the trade balance.

Exports to the U.S. increased 10.5%, and to China, they advanced 14.1%, according to the data released by the Ministry of Finance.

Shipments to China may have been positively affected by the calendar shift of the Lunar New Year holiday ending earlier than usual.

The yen weakened an average of 4.3% from a year ago to 154.61 against the dollar in February, the Finance Ministry said.

However, imports declined by 0.7% to 8.6 trillion, marking the first contraction since November.

This decline followed a strong 16.2% jump in January, the largest increase in nearly two years.

Japan's trade gap with the U.S. rose 29% to 918.8 billion yen, driven in part by a 14% rise in automobile exports, which is likely to cause the Trump administration to demand more actions from the Japanese government to address the persistent trade deficit.

In 2024, Japan recorded a trade deficit of 5.3 trillion yen, significantly narrower than the 9.5 trillion yen shortfall in the previous year.

Japan Indexes and Movers

The Nikkei 225 Stock Average decreased 0.3% to 37,751.88, and the broader TOPIX added 0.5% to 2,795.96.

Trading houses were among the most actively traded stocks in Tokyo for the second day in a row after Berkshire Hathaway increased its stakes in five leading companies between 8.5% and 9.8%.

Mitsui & Co. Ltd. increased 2.9% to ¥2,977.0, Sumitomo Corp. advanced 1.1% to ¥3,658.0, Marubeni Corp. gained 2.5% to ¥2,588.50, Itochu Corp. jumped 3.9% to ¥7,393.0, and Mitsubishi edged up 3% to ¥2,824.50.

Berkshire acquired initial stakes in five trading houses in mid-2019 at an aggregate cost of $13.8 billion, which had a market value of $23.5 billion at the end of 2024, according to company's regulatory filings.

On Thursday, Japanese markets will be closed for the Vernal Equinox holiday.