Europe – Tariffs on their way
On April 2nd, Trump plans to implement global reciprocal tariffs on countries with trade surpluses towards the US. Termed as “Liberation Day” by Trump, investors fear the announcement sparks a new risk-off episode as the markets interpretation has lately shifted towards growth instead of inflation fears. Europe is at particular risk with seemingly little room to negotiate. Bloomberg Economics estimates $600bn worth of EU trade to be affected and that 70% of EU exports to the US may be cut. This would hit EU GDP by -1.5%. Europe has recently benefitted from a big euphoria post the massive German fiscal package, but we believe this will now shift to near-term growth concerns.
Fed – Transitory is back
The Fed held rates unchanged at 4.25-4.5% last Wednesday but struck a more dovish tone than expected. The projections featured a weaker growth outlook expecting 1.7-1.8% GDP growth in the years ahead, while inflation for 2025 was revised higher to 2.7%/2.8% for headline and core PCE respectively. The rate path in the dot plot was left unchanged, expecting two cuts this year. In the press conference, Powell described rising goods inflation from tariffs as likely transitory and the rise in inflation expectations in the University of Michigan survey as an outlier. The market read Powell as dovish, and US 2y yields fell 12 basis points on the day. The US economic outlook is more uncertain than usual amid Trump’s foreign and economic policies, so we expect the Fed to tread carefully.
Turkey – Political risk back on the radar
Erdogan surprisingly detained his key political opponent Istanbul Mayor Imamoglu last week, sparking turmoil in Turkish assets and spilling over the global markets. Imamoglu is seen as a powerful contender to challenge Erdogan in the next election, so the move undermines recently built trust in Turkish economic policy. Turkish stocks fell 9% last Wednesday, the Lira depreciated up to 12% against the USD, while German Bund yields fell 6 basis points amid a broader risk-off move but later recovered. The Turkish Central Bank reacted swiftly, raising overnight rates by 2% to 46% to restore economic calm, and sold at least $8bn on Wednesday to counteract the weakness in the currency. The narrative for Turkey was recently very positive, as the new finance ministry and central bankers restored economic calm and attracted investors into the lira and local assets. Investors are now looking forward to the IMF spring meetings in Washington in April, to meet policy makers and understand the path ahead.
Algebris Investments’ Global Credit Team
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