US macro – The myth of exceptionalism
In our recent analysis, we look at the implications of current US policy on macro. We believe the US macro is potentially at a turning point, as the first policies being implemented are growth unfriendly. Both trade restrictions and spending cuts adversely affect the economic outlook. The US tariff rate is now 4%, up from close to 0%, and is expected to rise further in the next few weeks. Furthermore, consumer and business uncertainties are now at levels not seen in the past fifteen years. Historically, this signals a sudden stop in spending, employment and investment. As markets were priced for Trump’s policies to be positive for US and negative for anyone else, this turning point will have a cost for US risk assets. A correction started this week, but cumulative inflows in US assets have been very large over the past three years. A reversal will lead to more weakness. We favour European and global assets over US assets, and rates over risky assets in this environment.
Tariffs – April showers
The tariff threat is the key short-term focus for markets. So far, the US has introduced an additional 20% tariff on China, 25% tariffs on Mexico and Canada (except for USMCA eligible goods), and 25% on steel and aluminum products. According to recent communications from the President and the Department of Commerce, in April tariffs on Europe (25% or 10% depending on goods), the remaining portion of Canadian and Mexican goods, and reciprocal tariffs should be put in place. Furthermore, the US administration is considering a new tariff on critical imports. China, Canada, and Europe have already announced retaliations while Mexico is holding off. As the largest chunk of the trade war is likely to play out in April, we expect a further increase in volatility in the next few weeks.
Fed – Scenarios fanning out
This Wednesday, the Fed will hold rates unchanged at 4.5% and will likely continue to indicate two rate cuts for 2025 in the dot plot. The Summary of Economic Projections (SEP) will likely show expectations for higher inflation but lower growth, amid the erratic tariff policies of Trump. Furthermore, the Fed may announce a pause or end to Quantitative Tightening (QT) starting in April, as the debt ceiling remains a problem. Last week, US CPI rose 2.8% YoY in February, 0.1% below expectations. Core inflation slowed to 3.1% YoY (0.23% MoM), reversing the strong January print. Most of the slowing came from services categories, whereby core goods were relatively stable. The components feeding into PCE inflation, the Fed’s preferred inflation measure, were stronger, however, and together with PPI resulted in a forecast of ca 0.3% MoM for core PCE. Friday’s University of Michigan survey showed yet another strong uptick in inflation expectations, with 1Y rising to 4.9% (+0.6%) and 5-10Y rising to 3.9% (+0.5%), while consumer sentiment surprised to the downside.
Algebris Investments’ Global Credit Team
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