(Opinions expressed are those of the author.)

By Mike Dolan

A look at the day ahead in U.S. and global markets from Mike

Dolan.

We've revamped Morning Bid U.S. to offer you more in-depth

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World markets are entering March with Friday's alarming Oval

Office row reverberating on both sides of the Atlantic, raising

more questions about increasingly unpredictable geopolitics just

as investors are also turning anxious about a potential economic

slowdown.

Tuesday's U.S. tariff deadline, labor market updates and China's

National People's Congress will all jockey for attention this

week. But I'll delve into the European Central Bank's likely

interest rate cut on Thursday for today's spotlight.

TODAY'S MARKET MINUTE

* European leaders including the UK have joined forces to

draft a

peace plan for Ukraine to present to Trump

* Bitcoin has surged more than 20% from last week's lows,

along

with several other cryptocurrencies after Trump hints at the

creation of a new U.S. strategic reserve.

* U.S. House Speaker Mike Johnson says he wants a "clean"

stopgap

funding measure to keep federal agencies operating.

* Commerce Secretary Howard Lutnick says tariffs on Canada

and

Mexico will go into effect tomorrow, but Trump will determine

whether to stick with the planned 25% level.

* Parties in talks to form Germany's new government are

considering quickly setting up two special funds - potentially

worth around 400 billion euros ($415 billion) for defence and

400 billion to 500 billion euros for infrastructure, ⁠sources

told Reuters.

ECB MAY FEAR STUMBLING INTO STIMULUS

Few doubt the European Central Bank will cut interest

rates again this Thursday, but there are fears in the ECB ranks

that easing much further after that may see it inadvertently

stumble into stimulative territory before inflation has been

licked.

And pity the poor central banker trying to work it out.

Much like its peers around the world, the ECB is due to review

policy again and issue a series of long-term forecasts even

though it barely knows what the economic or political backdrop

will be next month.

Uncertainty about potential U.S. tariffs, the identity of

the new German government, the fate of Ukraine and a likely new

public spending boost to re-arm the continent are all fogging up

ECB eyeglasses considerably.

As it would probably admit itself, staff forecasts at this

juncture are little more than a finger in the wind.

Further complicating things is the fact that several

critical macroeconomic inputs used to assess the ECB's inflation

outlook have been swinging back and forth wildly this year.

Take European natural gas prices.

From the middle of January, they rocketed about 30% higher,

only to reverse all that by the middle of last month.

As Rabobank economists note, the ECB likely sealed its new

macroeconomic projections when gas prices were at a peak in the

middle of February - embedding gains of some 140% year-on-year

as opposed to 85% now.

R-STAR WARS

The macro mist simply forces the central bank to seek other

lodestars to guide its policy deliberations, and hence its

recent obsession with the much-maligned and nebulous 'neutral'

interest rate concept.

So-called R*, the interest rate present when an economy is

at full employment with stable inflation, is highly dependent on

model assumption and impossible to identify in real time. But

this theoretical figure at least offers policymakers some idea

of whether existing policy is restrictive or stimulative.

There's little doubt among ECB members that current rates

are now above that neutral rate and still 'restrictive', which

is why there is likely to be agreement on another cut this week.

But the hawks among them may make a stout defense for more

caution from April onwards, pointing to the slipperiness of R*.

Helpful or not, ECB economists last month took another stab at

capturing this elusive beast and put the policy rate associated

with the real R* in a 1.75%-2.25% range.

The centrepoint of that is roughly where most policymakers

had assumed R* to be. But the range is quite important for

financial markets, as the two ends of the range represent the

difference between four more cuts or just two from today's 2.75%

deposit rate.

ECB board hawk Isabel Schnabel's typically detailed and

data-packed speech in London last week laid out a case for being

wary of excessive easing due to the elusiveness of the enigmatic

R*.

The gist of her talk was that incoming lending data had cast

doubt on how tight ECB policy actually is, meaning continual

easing to address structural GDP weakness may be misguided.

And she concluded that uncertainty about just how high R*

had risen of late meant there was a risk that the central bank

would unintentionally lapse into stimulative monetary policy.

"The fact that growth remains subdued cannot and should not

be taken as evidence that policy is restrictive."

Even though Schnabel believes R* is still below levels seen

before the banking crash 17 years ago, she said it had increased

"appreciably" since before the pandemic and again since the 2022

Ukraine invasion - perhaps more than market prices suggest.

That, she said, was related to geopolitical supply shocks,

rising public debt and withdrawal of central banks from bond

markets as they reduced their balance sheets.

If she's right, then the ECB may need to tread very carefully

after this next cut. Especially if she's correct that higher

public debt is a significant factor in the R* debate, as there's

little doubt that's about to ratchet higher if Europe truly does

re-arm.

The doves will fight back, of course, but the central

banking battle lines are being drawn.

CHART OF THE DAY

After a sweep of soft U.S. economic indicators in February,

the Atlanta Federal Reserve's closely watched "GDPNow" model

updated on Friday to show an alarming 1.48% contraction of the

economy.

This was partly driven by a widening U.S. trade deficit,

likely reflecting firms frontloading imports to beat planned

tariff rises. But it's the first negative GDP print from the

model since the Fed's rapid interest rate rises in 2022. While

imports and weather-related distortions mean some may dismiss

this red flag, waning business and consumer confidence - and the

very real impact of tariffs hikes and government job cuts -

should keep this signal on market radars.

TODAY'S EVENTS TO WATCH

* US February manufacturing surveys from ISM and S&P Global,

January construction spending

* St. Louis Federal Reserve President Alberto Musalem

speaks;

Chair of European Central Bank Supervisory Board Claudia Maria

Buch speaks

* President of Italy Sergio Mattarella visits Japan

Opinions expressed are those of the author. They do not reflect

the views of Reuters News, which, under the Trust Principles, is

committed to integrity, independence, and freedom from bias.

(By Mike Dolan; Editing by Anna Szymanski

[email protected])