Trump initiated direct peace talks with Putin to address the ongoing conflict in Ukraine. Moreover, a look at US tariffs and inflation.
Ukraine plan – A US business.
Trump initiated direct peace talks with Putin to address the ongoing conflict in Ukraine. This move has raised concerns among European and Ukrainian officials, who fear that Ukraine might be compelled to cede territory without adequate security guarantees. Zelenskyy insists on being included in peace negotiations and is coordinating with the U.S. to develop a unified strategy before engaging directly with Putin. The proposed peace deal could involve Ukraine giving up claims to certain territories and accepting a neutral status, while Europe would assume a more significant role in Ukraine’s post-war reconstruction and security.The Munich security conference over the weekend revealed a more complicated political landscape than the one described by Trump: European leaders are keen to participate to negotiations, and the VP Vance speech sparked widespread anger. We see a path towards an agreement in 1Q25, but the road seems bumpier than market is pricing.
US trade – More tariffs, more time.
Trump announced reciprocal tariffs last week, whereby the US aims to match any foreign tariffs, but determines the exact level on a country-by-country basis. The tariffs are likely to come into effect on April 1st, but given the recent history, the date may also be delayed upon negotiations. The details are very unclear: if tariffs will target all countries globally, which goods will be affected and how immediate this will be. This triggered a risk-off reaction in European assets, where the auto industry is likely to be the most targeted, and government bond yields falling. For now, the base case is still the same: further tariffs on China, on the European car industry, and on critical imports like tech and pharma.
US Inflation – Seasonal fears.
US CPI inflation surprised strongly to the upside last Wednesday, showing a similar pattern as previous Januarys amid seasonal distortions. Core CPI printed at 45bp MoM and supercore inflation at 76bp MoM, which on a three-month average annualise to 3.9% and 5.4% respectively. The PPI components feeding into PCE inflation were negative however, so that core PCE inflation is expected to rise at a more moderate pace around 30bp MoM, annualising to 2.3% on the three-month average. The pattern in 2024 was very similar, with inflation across categories rising strongly on seasonal effects, raising a debate over the likelihood of further hikes. The difference this year is that inflation expectations are on the rise under Trump anyway, so that a seasonal uptick in Q1 inflation poses a much bigger headache. We will require several prints to confirm if this January was truly seasonally driven again or not, but we believe the bar for the Fed to hike is still high for now.
Algebris Investments’ Global Credit Team
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