The year has only just begun, yet it has already brought numerous surprises. These have done nothing to calm a prevailing sense of uncertainty in markets and among investors: a headline-grabbing US intervention in Venezuela, Federal Reserve Chair Jerome Powell being threatened with prosecution, and vigorous chest-thumping by President Trump over Greenland.
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Better call a lawyer
The possible return of a major spat over trade between the US and Europe could shake financial markets. That and a number of legal cases in the US will need monitoring by investors.
The Supreme Court is due to rule on the legality of President Trump’s recourse to the International Emergency Economic Powers Act – a law mentioned this month in relation to Greenland – and used last April to impose ‘reciprocal’ import tariffs without congressional approval.
This week, the court will also review Trump’s attempt to remove Fed Governor Lisa Cook from her position. Its decision could have major implications for the Fed’s independence as could a threat by the Department of Justice to start a criminal prosecution against Fed Chair Powell.
The DOJ alleges Powell lied to Congress while testifying last June about the cost of renovating the Fed’s Washington headquarters. The move comes amid government pressure for the Fed to slash policy rates.
So far, there has been a surge of support for the Fed Chair, including from Republicans. Senator Thom Tillis, a Senate Banking Committee member who reviews presidential appointments at the Fed, said he would oppose any of Trump’s nominees “until [the] investigation [is] over”.
Powell, whose term ends in May, may decide to stay on as a regular member of the Board of Governors: his term on the board runs until January 2028.
Succession (in central banks)
The uncertainty around the appointment of Powell’s successor as Fed Chair is one thing, but monetary policy decisions remain the responsibility of the Federal Open Market Committee (FOMC).
Traditionally, the Chair seeks consensus, but FOMC members can see things their own way. Last week, Chicago Federal Reserve President Austan Goolsbee said the Fed should be focused on getting inflation down. He warned that inflation could come “roaring back if you try to take away the independence of the central bank.”
The minutes of December’s FOMC policy meeting showed a deeply divided FOMC. Among those policymakers who voted for a rate cut, several said they could have opted for the status quo and some suggested ‘it would likely be appropriate to keep the target ranged unchanged for some time’.
In the Eurozone, the successor to the Vice President of the ECB was appointed on 19 January. While the President of the Central Bank of Croatia, Boris Vujčić was not one of the favourites, he will succeed Luis de Guindos on 1 June.
This was the first step in a process at the end of which four of the six members of the ECB Board of Governors will have been renewed. Christine Lagarde’s term as president ends in October 2027.
Games of tariffs
President Trump’s bluster about ‘buying Greenland’ has brought an unexpected threat of new tariffs on exports to the US from the UK, Norway and six European Union countries as they discuss the option of using the EU’s Anti-Coercion Instrument. This seeks to protect member states from economic coercion by third countries and provides a framework for possible retaliation.
Economic coercion arises when a country seeks to pressure the EU by applying or threatening measures affecting trade or investment.
In the case of Greenland, there are reports that the European Parliament will now not ratify the trade agreement signed by Trump and European Commission President Ursula von der Leyen last July.
Even though only six EU states are targeted, Europe has reacted firmly with one voice. The effective tariff rate on European goods exported to the US is about 7% (due to numerous exemptions). While Trump is threatening an additional 10% tariff (rising to 25% in June) if he doesn’t get his way, it is not clear whether he will persist or back down.
President Trump is due to speak at the Davos Summit this week. An extraordinary EU leaders’ summit on transatlantic relations is scheduled for Thursday 21 January.
Economic data: Nothing much to report
In the US, the latest data on inflation in 2025 (headline inflation at 2.7%, core at 2.6%) is likely to have been distorted by the government shutdown (see Exhibit 1). Prices were collected later than usual (and closer than normal to Black Friday). This should have led inflation to rebound in December. But this has not shown up in the data so far.
*PCE: Personal Consumption Expenditures, CPI: Consumer Price Index
Data as at 20 January 2026, Sources: Federal Reserve, Bloomberg, BNP Paribas Asset Management.
January’s issue of the Beige Book, which summarises anecdotal information on economic conditions in each Federal Reserve district, pointed out that “cost pressures due to tariffs were a consistent theme across all districts’ as ‘contacts… were beginning to pass them on to customers as pre-tariff inventories became depleted or as pressures to preserve margins grew”.
This message does not match with the latest consumer price indices, which do not point to inflation becoming entrenched.
US retail sales surprised to the upside in November (+0.6% month-on-month), showing resilient consumer spending despite low confidence and slower employment. This suggests the resilience of private consumption in the third quarter (+3.5% annualised) extended into the fourth.
In China, GDP growth reached the official 5% target in 2025. Momentum eased at the end of the year; growth increased by 4.5% in the fourth quarter after 4.8% in the third.
Retail sales remained sluggish at the end of the year, down by 0.1% from the previous month (after falling by 0.4% in November) and up by only 0.9% year-on-year, the lowest since December 2022. Strong external demand underpinned industrial production, but investment contracted sharply in December.
In the Eurozone, industrial production rose by 0.7% month-on-month in November, which was better than suggested by the slight downturn in business surveys at the end of the year (see Exhibit 2).
Data as at 20/01/2026. Sources: Bloomberg, BNP Paribas Asset Management.
In December, Germany’s Ifo Business Climate Survey deteriorated to its lowest since last May, with companies more pessimistic about the first half of 2026. The message from the ZEW Business Survey of financial analysts was more positive, reflecting hopes of a ‘new momentum’ from Germany’s expansive fiscal policy. In January, the index surged to 59.6 points.
