EU Defense, Trade Wars, and Inflation Trends

Oliver Bennett

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Oliver Bennett

Welcome to this special episode of "The After Market Party." I'm Oliver Bennett.

Oliver Bennett

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Oliver Bennett

So, this past week has been packed with developments that could, frankly, define the next decade for both European security and global trade. Let’s start right in with the headline from Europe—the massive, 800 billion euros defense investment plan announced at the EU summit on 6th of March. This is being hailed as a watershed moment for European defense strategy, driven largely by the United States’ withdrawal of military aid to Ukraine. That decision has left the EU nations scrambling to, well, redefine their security framework without America as the safety net they’ve leaned on for decades.

Oliver Bennett

Now, this wasn’t just about money, although 800 billion is an eye-watering figure—more than double what many had anticipated. The summit also exposed some of the deep divisions within the EU. Hungary, for instance, outright refused to back a joint conclusion supporting Ukraine. And then you’ve got France’s Emmanuel Macron suggesting his country’s nuclear deterrent could be extended across the bloc—now that stirred plenty of debate, some countries cautiously backing it, while others like Germany waved it off in favor of boosting conventional military investment. It all feels like a European family meeting where no one agrees on who’s bringing what to the table, yet they all know the stakes are too high to walk away empty-handed.

Oliver Bennett

But beyond the political drama, the economic implications are profound. We’re talking about a monumental pivot in spending priorities. Germany, for instance, is looking to re-purpose existing industrial plants, potentially shifting from car parts to, yes, military equipment. Just think about that—a nation long synonymous with luxury cars may soon align its industrial legacy with tanks and defense systems. And this shift isn’t happening in a vacuum. Financial markets are already reacting, with Eurozone bonds selling off massively driven by expectations for increased bond supply and less dovish ECB policies . What we’re really seeing is the start of a recalibrated fiscal landscape across Europe, but at a cost that’s causing plenty of unease amongst investors.

Oliver Bennett

Now, shifting to the other side of the Atlantic, President Trump’s latest barrage of tariffs on Canada, Mexico, and China is playing havoc with global trade dynamics as well. On Tuesday, the U.S. imposed blanket 25% tariffs—although energy products like oil and gas were spared with a lighter 10% levy. The next day? Trump announced exemptions for USMCA-compliant goods until April. It’s the kind of policy flip-flopping that markets absolutely hate—uncertainty being the trader’s worst enemy, after all. The back-and-forth highlights tensions not just with those nations, but also within Washington itself, where factions within the administration appear to be jockeying for influence over these decisions.

Oliver Bennett

So what do these shifts in European military spending and U.S. trade policy add up to? We’re likely looking at two intertwined narratives here—one of Europe reluctantly stepping into a more self-reliant defense role, and the other, a United States increasingly isolated from allies economically and diplomatically. And, honestly, both could profoundly reshape the global balance of power, economically and geopolitically. But there’s much more to unpack, especially when we think about the cracks in the underlying consumer and industrial datasets. Let’s pick that up shortly.

Oliver Bennett

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Oliver Bennett

Diving into the macro picture, it’s fair to say that global industrial activity has had a mixed start to 2025. The latest figures point to a modest recovery in orders worldwide, clocking the fastest growth pace in three years. But let’s not read too much into that headline. The reality is that looming tariff threats from the U.S. could easily derail momentum, especially across advanced economies where, frankly, input costs for manufacturers are already surging.

Oliver Bennett

If we shift the spotlight to the United States, the numbers are revealing a bit of a, well, stark split between different sectors. The ISM Manufacturing Index dropped to 50.3 in February, barely clinging to expansion. The major drag? New orders plunged, as businesses held back amidst tariff uncertainty. But then, in contrast, the ISM Services Index showed some resilience—the headline index actually ticked up to 53.5.

Oliver Bennett

And and then we have the February jobs report from Friday. It’s—it’s a tricky one to unpack. Non-farm payrolls rose by 151,000. Respectable on paper, yes, but a tad below expectations, and the unemployment rate nudged up to 4.1%. What really caught my eye here is the softer growth in average hourly earnings. It’s yet another signal that we’re looking at an economy trying to stabilize rather than charge forward.

Oliver Bennett

And across the Atlantic, the Eurozone also feels, well, stuck in a bit of a quandary. Industrial production has been weak, especially in France where the January data showed a 0.6% drop. Add to that some disheartening retail sales—down 0.3% in January—and it’s clear consumer spending remains subdued. It’s not all doom though. The Eurozone core inflation rate for February came in at 2.6%, a tad above economist expectations but slightly lower thanJanuary's 2.7%.

Oliver Bennett

Putting it all together, we’re left with an uneasy macro backdrop. Weak PMIs in the Eurozone, disappointing U.S. data—these are breadcrumbs leading towards a more hesitant global recovery. And with tariff uncertainty still casting a long shadow, the risks to broader consumer and investor sentiment should not be underestimated.

Oliver Bennett

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Oliver Bennett

Let’s turn our attention now to markets, starting with bonds. Back in 2012, when Mario Draghi, then head of the ECB, pledged to do ‘whatever it takes’ to save the euro, bond markets took it as relief. Fast forward to today, and that same sentiment from German Chancellor-in-waiting Friedrich Merz feels quite different. German 10-year yields surged roughly 40 basis points this past week. That’s a significant move, driven by fears of higher European spending and the long-term implications it holds for borrowing costs. Following the sharp move, we’re likely heading into a consolidation phase, where a reasonable trading range for the German 10 year yield could settle between 2.50% and 3.00% for the coming months.

Oliver Bennett

In equities, it’s a bit more of a patchwork story. European defense stocks—no surprises here—are riding a rally. Since the EU’s commitment to ramping up military spending, shares in the region’s aerospace and defense industries have surged. But it’s worth keeping in mind that the overall market trends are more subdued. What might end up tempering this rally is the reality that much of Europe’s increased defense spending could actually flow to American firms, limiting the upside for European equities.

Oliver Bennett

Turning to U.S. equities now, we see, well, more volatility. The S&P 500 index has notched its third consecutive week of declines, down 3% on the week. Markets hate uncertainty, and with President Trump’s erratic trade policies—tariffs imposed one day, exemptions granted the next—it’s hard for anyone to feel confident. Add to this the increased likelihood of more tariff-induced price hikes and we’ve got markets firmly in this risk-off mode.

Oliver Bennett

And then there’s the euro-dollar dynamic. The euro has staged a remarkable rebound, gaining over 4.5% against the dollar last week. That’s one of the largest weekly gains on record. The catalyst here has been Europe’s fiscal pivot. Germany’s historic decision to break its debt brake rule in order to fund military and infrastructure projects has sent a clear signal—a new, more proactive Europe is emerging. And the dollar, meanwhile, is under pressure, weighed down by concerns over U.S. trade policy and the broader economic outlook. What’s fascinating is how quickly sentiment can shift; the dollar, which felt unshakable just months ago, now looks increasingly fragile.

Oliver Bennett

All of this leaves us at a bit of a crossroads. With bonds adjusting to fiscal policy changes, equities struggling with geopolitical and economic uncertainty, and currency markets reflecting broader global realignments, it’s clear that we’ll have more volatility ahead. And speaking of volatility, let’s dig into the upcoming inflation data and consumer sentiment in the next section.

Oliver Bennett

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Oliver Bennett

Looking ahead, the new week offers some critical data points that could steer market sentiment. Top of the list? U.S. February inflation data this Wednesday. This report carries a lot of weight. January data showed core consumer prices spiking—the largest in months—and markets are eager to see if that trend truly reverses. A slower monthly increase of 0.3% is expected, but as always with inflation, there’s plenty of room for surprises. Of course, keeping an eye on Friday’s consumer sentiment report will also be important. Tariffs, equity volatility, and broader economic uncertainty have taken their toll, and the numbers will likely reflect more cautious sentiment across households.

Oliver Bennett

Meanwhile, over in the Eurozone, the calendar is thinner. German and Eurozone industrial production figures are set to drop in the week, and let’s be honest, expectations aren’t exactly high. Weak production numbers could set a somber tone for Europe’s broader economic outlook despite past week's fiscal announcements.

Oliver Bennett

In summary, this week is dominated by inflation, industrial activity, and consumer sentiment offering a snapshot of economic resilience—or frailty. And that brings us to the close of another episode. As always, thank you for joining me here on The After Market Party. It’s been a pleasure unpacking these intricate dynamics with you.

Oliver Bennett

Don't forget to leave your thoughts in the comments below! And if you want to learn more about the macroeconomic and political landscapes and their market implications, be sure to check out our other episodes of the After Market Party.

Oliver Bennett

Until next time, stay informed, stay thoughtful, and keep your hands on the wheel!

Oliver Bennett

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Oliver Bennett

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