Tracking the Trump administration’s trade policy announcements could well become complex. After the surprise one-month delay in tariffs on products from Mexico and Canada (initially scheduled to come into force on 1 February), the president’s pledge on 9 February to implement 25% tariffs on all steel and aluminium imports into the US made the headlines… what comes next?
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Back to fundamentals, for now at least…
With the presidential decree signed on 10 February, the 25% tariffs are expected to apply ‘without exception or exemption’ (well, except perhaps for Australia) from 12 March. It’s just one month to that deadline and a lot can happen between now and then.
It seems to us more constructive to look at economic indicators than trying to work out how (assumptions about) tariffs might feed into the forecasting models.
The US employment report on 7 February should have been the primary market focus. It showed job creation slightly below market consensus expectations at 143 000 versus 175 000 (according to Bloomberg). The figures for December were revised up. The jobless rate fell from 4.1% to 4.0% and the average hourly earnings growth rate was at around 4%, as it has been for several months.
With the release of its January data, the Bureau of Labor Statistics also published annual benchmark revisions to non-farm payrolls. Job creation in 2024 was slightly lower than the first estimate had suggested (-100 000 at 2 million), but the adjustment to population estimates for the household survey increased the total civilian labour force by 2.1 million.
Overall, then, this employment report appeared to be in line with the soft-landing scenario as it suggests a gradual slowdown in wage rises is underway.
The surprise for investors came from the preliminary results of the University of Michigan household confidence survey: in January, the index fell from 71.1 to 67.8, its lowest level since July. This is likely due to the rise in petrol prices since November.
The rebound in 12-month inflation expectations (from 3.3% to 4.3% for the median estimate, the highest since November 2023) gave more cause for concern.
The result appeared highly dependent on the political stance of the respondents (see Exhibit 1):
- According to this survey, supporters of the Republican Party (who, in part, held the Biden administration to account at the polls for a loss in purchasing power) seem convinced that inflation will now disappear.
- In contrast, the data suggests Democratic voters fear steep price rises due to tariffs and other measures envisaged by the Trump administration.
The January New York Fed Consumer Expectations Survey results were less worrying. Households made no changes to their one-year and three-year inflation expectations. Over a five-year horizon, they rose slightly, but did not show the acceleration momentum seen in the Michigan survey.
…and central banks
After these surveys, investors will likely focus on how inflation behaved in January. Consumer and producer price indices will be published on 12 and 13 February. The figures should help economists to refine their forecasts of the Federal Reserve’s preferred measure of core inflation (personal consumption expenditures excluding food and energy deflator – core PCE).
December data had reassured markets, with the core PCE at 2.8% for the third consecutive month. However, policymaker comments have suggested that the Fed would not be satisfied with inflation settling at this level (clearly above its 2% target for core inflation).
Fed Chair Jerome Powell’s testimony before Congress on 11 and 12 February will give him an opportunity to refine this message as expectations of further cuts in key US rates have fallen back to only a little more than one cut this year (and none in the first half of the year).
And while Trump’s suggestion of a shortened mandate for the Fed chair (which Jerome Powell has rejected) and the question of the Fed’s independence may not be addressed directly, investors should keep both issues in mind.
What about the ECB?
Market expectations of a cut in key rates by the European Central Bank (ECB) remain high. Futures markets reflect expectations of more than three additional cuts and an expected policy rate at below 2% in the second half of 2025.
The ECB has indicated that its new estimates of the ‘neutral’ rate put it in the 1.75%-2.25% range – that is a little lower than previously signalled. However, opinions remain divided on the ECB council between members who feel that inflation ‘well above 2%’ implies restrictive monetary policy (Philip Lane) and those who see inflation ‘converging to 2% in the spring’ (Luis de Guindos).
Bank of Portugal Governor Mario Centeno indicated that core inflation may fall below the 2% target and if so, cutting the policy rate to below the neutral rate may be necessary to stimulate the eurozone economy.
ECB President Christine Lagarde has reiterated that the disinflation process is ‘well on track’, but has also pointed out that ‘greater friction in global trade would make the [eurozone] inflation outlook more uncertain’.
In January, the diagnosis of other ECB governors on the effects of US trade policy seemed more nuanced, with some arguing that eurozone growth would suffer, while others pointed to the risk of an inflationary impact.
With inflation data for January due out this week – Germany (13/02), the Netherlands (13/02) and Spain (14/02) – attention will centre on the evolution of services prices which have been a focal point for the ECB. French data showed a stable unemployment rate in the fourth quarter, but a sharp rise in people who want a job without being considered unemployed), while employment of people aged 15 to 64 declined, in another sign of a less dynamic labour market.
In its coming discussions, the ECB will need to focus not only on inflation.
And what about our asset allocation?
As noted by central bankers since the start of the year, expectations for growth and inflation are tainted by uncertainties related to US economic policy. It seems reasonable, however, to rule out a recession. That implies a continued favourable environment for risky assets.
However, market nervousness is likely to remain high. We could see erratic movements in the coming weeks unrelated to macro or microeconomic fundamentals.
In this context, we tactically reduced our equity exposure to neutral. Considerations, including investor positioning in US equities and valuations that look stretched in some indices and sectors explain this decision.
In contrast, the high levels that yields of long-dated bonds reached in mid-January have provided an opportunity to go tactically overweight duration in eurozone government bonds given the expected policy rate cuts and the sluggish growth outlook. On the other hand, arguments such as solid US growth and the Fed’s wait-and-see stance call to us for caution on US Treasuries.
Given the political, geopolitical, tariff-related issues, we still expect euro investment-grade credit to attract investor interest. Despite the rise in real rates and the US dollar, the factors supporting precious metals, especially gold, remain in place: sustained appetite from central banks, limited production, and their inflation hedging properties.
